Emerging-Market Traders Cut U.S. Election Volatility Wagers
(Bloomberg) - Traders around the world may get the idea that the US election isn't going to be the tumultuous event that was anticipated earlier.
But the real believers seem to be in emerging markets.
Optimism that the November election result will remain undisputed, and speculation that a US stimulus package will have to be agreed upon regardless of the outcome, dampen concerns about volatility by the end of the year. While US VIX futures fell last week as bets on likely price volatility eased, the decline was slower than that of emerging markets.
"It appears that emerging market investors will be slightly more optimistic about risk than developed market investors through the end of the year," said Nick Stadtmiller, a New York-based strategist at Medley Global Advisors. “As long as global liquidity is adequate and global markets at least hold their own, I would expect emerging market assets to do well. The returns on many emerging market assets are high, especially when compared to the lows on developed market assets. "
Falling volatility could give investors more confidence to invest cash in an asset class that is in one of its best stages since the virus-induced global sell-off in March. Citigroup Inc. said last week that the worst is over for assets in developing countries and Morgan Stanley is betting that volatility will continue to decrease when the November vote result becomes clearer.
Emerging market equities and currencies rose to an eight-month high on Friday, while local currency debt had its best week since May on the prospect of fiscal stimulus in the US. One-month implied volatility in the Brazilian real, South African rand and Russian ruble declined the most among peers last week, suggesting an improved appetite for risky assets.
"Markets are positioned for a new dose of fiscal stimulus and former Vice President Biden won the election and the Democrats regained control of the Senate," said Piotr Matys, a London-based strategist at Rabobank. "Even if there is no agreement before November 3rd, the markets know that it is only a matter of time before a financial package is implemented."
Bank Indonesia's interest rate decision will be made on Tuesday. The consensus is strongly in favor of no change as the central bank tries to protect the rupiah. However, the acute need for domestic stimulus, as well as the fact that headline inflation has been below the central bank's target range for five months, may lead to a cut being considered. The rupiah appreciated by more than 1% last week and is currently significantly stronger than the central bank's perceived stress point of 15,000 On Thursday, Indonesia reports trading numbers for September. A continuation of the slump in imports caused by Covid should keep the trading account in excess. The Bank of Korea meets on Wednesday and is expected to pat unanimously. With interest rates close to the effective floor, the hurdle for further easing is high. Korea won 1-month NDFs, which saw Asia's strongest performance last week as the odds shifted more to Joe Biden's election victory and the yuan appreciation through the Monetary Authority of Singapore fell on Wednesday. Consensus does not expect any change In large parts of the Asian region, decisions by central banks to intervene are influenced by the trade-weighted exchange rate and the business cycle. Hence, the MAS forward-looking approach to policy-setting can affect the perception of the most cyclical Asian currencies - like those won. According to Bloomberg Economics, the Taiwan dollar, the Malaysian ringgit and the Thai BahtChile central bank are expected to keep their key rates at 0.50% on Thursday without announcing any new quantitative easing measures. The peso was the best performing currency in emerging markets for the third quarter. According to BloombergUganda, monetary policy will also be decided on Thursday and Sri Lanka on Friday
Cheaper too short
China's policymakers have acted to stem a yuan rally by removing rules that have made betting against the currency expensive. Financial institutions will no longer have to set aside cash for purchases of foreign currency for customers via currency forwards as of Monday, People's Bank of China said over the weekend, the yuan reopened with a bang in the onshore market on Friday, with a stronger than expected official fixing after the Golden week holidays. It closed at around 6.69 per dollar, the highest since April 2019. China's trade data will be released on Tuesday. The healthy trade surplus has been part of the strong yuan history, and consensus forecasts predict another 10% year-over-year increase, bringing the surplus to $ 60 billion on Thursday. Inflation data is due on Thursday. The headline rate is expected to drop below 2% year-on-year for the first time since February 2019. The money data is due sometime in the week. Overall funding is likely to slow from the surge last month
Malaysia announced industrial production in August on Monday. Consensus expects a dreary result of almost zero compared to the previous year. Ringgit saw modest gains of around 0.4% last week. India released September CPI data on Monday. The result is expected to be above the Reserve Bank of India's 6% YoY tolerance for the sixth straight month. This has prevented the RBI from making the rate cuts required for the economy and has apparently increased its tolerance of the rupee's appreciation. Industrial production for August is also due on Monday and is expected to continue to decline sharply year over year. September's trade balance is reported as its Thursday the rupee was stable last week, making it a deficit in Asia after the central bank on Friday signaled further policy easing and announced a series of liquidity moves to support an economy that is under way this fiscal year recorded a decrease of 9.5%. The Monetary Policy Committee kept the benchmark buyback rate at 4%, as expected, but kept its political stance, which means it could ease off again. The Philippines' remittance growth figures for August are due to be released on Thursday. Consensus expects growth of around 5% compared to the previous year. The peso's 0.3% gain last week was the second lowest among emerging Asian currencies. Turkey reports the current account balance for August on Monday, followed by industrial production on Tuesday. The lira is the worst performing in emerging markets this month, even after the central bank unexpectedly raised its weekly repo rate by 200 basis points in September and authorities lifted a number of trading restrictions on the currency. Azerbaijan and Armenia continued to report violations of a Moscow-brokered ceasefire. Major military engagements appeared to be on hold. SundayPoland reports its current account balance for August on Wednesday, followed by its flash CPI reading for September and last month's core CPI printing on Friday. Russia may report the current budget balance for the current year. Also industrial production in September and producer prices on Thursday and Friday. South Africa has manufacturing and mining operations on Monday and Tuesday in August, followed by retail sales on Wednesday and non-farm payrolls in the second quarter on Thursday. A September reading of Argentine inflation scheduled for Wednesday will likely see an annual decline, according to economists polled by Bloomberg. The nation is also expected to release data on the budget balance this week. Bloomberg Economics recommends watching the central bank try to stem the depletion of international reserves. Industrial production data in Mexico for August released on Monday is likely to show a year-over-year decline, although it has rebounded slightly since 2020. The Mexican peso has outperformed All of its peers this month as investors bet that heightened incentive under Biden's presidency will help boost Mexican exports to the US. In Brazil, investors will be watching the August economic data on Thursday for signs of GDP recovery in the third quarter. The nation could also slow the debate over the new welfare program and government spending cap until after the local elections in mid-November. The real was the biggest gain in emerging markets over the past week. An August reading of Peruvian economic activity on Thursday will likely show an even deeper drop than BloombergColombia surveyed a month earlier, a month earlier, retail sales are expected to be released on Thursday, giving money managers a better look at the country's consumer appetite amid the pandemic could give
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