In this week's Podcast
- Factors Behind Emerging Markets resilience
- Jackson Hole Symposium: Implications for Emerging Markets
- Key Events for the Week Ahead in Emerging Markets
Factors Behind Emerging Markets resilience
- Increased credibility of EM Central Banks.
- Shift in borrowing strategies towards local borrowers.
- Evidence of EM maturing as a more reliable asset class.
Jackson Hole Symposium: Implications for Emerging Markets
- The Jackson Hole Symposium follows crucial market juncture.
- Chair Powell's upcoming speech is highly anticipated.
- Potential impacts include, 1) Possible U.S. rate cut, 2) Shift from inflation concerns to growth focus, 3)Soft landing scenario for the U.S. economy.
Key Events for the Week Ahead in Emerging Markets
- Brazil's Inflation Print for August
- National Bank of Hungary meeting with potential rate cut.
- South Africa's PPI data for July, indicating inflation trends.
Transcript
Matt Jones
Welcome to the long and short of the week ahead. A production of your Eurizon SLJ Capital. That takes a look at the macro economic themes of the week ahead. And has been recorded for professional investors. My name is Matt Jones, head of distribution for your Eurizon SLJ capital, and I'm joined today by Alan Wilson portfolio manager on our emerging markets desk.
So for those Eagle eared listeners and regular listeners, you'll note a slight change to the lineup this week. Neil is away. And so we've decided this week to do a bit of a, an emerging markets takeover. Alan. Great to have you here.
Alan Wilson
Thank you very much Matt. It's great to be here.
Matt Jones
So let's dive straight in, really, as we've covered perhaps in recent weeks, and as listeners, we'll be more than aware. It's been a very volatile time in global markets. It's been a fast-moving macro environment as ever. So, how have emerging markets held up against that backdrop?
Alan Wilson
Yeah, it's been a really challenging calibration for not just EM but all risk assets over the last few weeks. I would say that the markets have been roiled by a triple whammy. We had the tech-led sell-off, then we had fears over the hard landing in the US after the downside surprises in the non-farm and ISM, and then we had the carry trade washout led by the Japanese Yen. So, all in all, it has been a bit of a tricky backdrop. But what I would say is that contrary to what we were taught in EM 101, local currency, hard currency and foreign exchange have all held up really quite well after this core market led volatility burst. The local bond index has returned about 70 basis points this month.
The hard currency bond index has returned about 2% this month on the EMFX composite basket and has rallied about 2.4% this month relative to the Dollar. All in all, I would say that the asset classes holding in really well. And even under the surface, you look at the key different country blocks or the geographic blocks, Asia, CEE & LatAm have had real positive asset performance in Indonesia, South Africa and Mexico across the bonds and the currencies. So what's happening here?
I think there's mounting evidence that we've reached a watershed moment for EM. We've talked a lot about this in our research over the last year or two. Just to reiterate, we think that the credibility of the central banks in EM has never been higher. They've been really responsive to the inflation shock that we've had over the last 18 months.
So we think they've really matured. At the same time, emerging market debt managers have learned lessons from the past. They are no longer borrowing in the Dollar; they are taking their borrowing towards local borrowers. So that's gone a long way to cutting the vulnerability to hot capital flows in and out of EM.
All in all, this most recent burst of volatility has shown us that EM has matured. It's turned into a more reliable asset class, and I think it's been a bit of a watershed for the asset class over recent months and weeks.
Matt Jones
Fantastic. Thank you, Alan. Bringing it back to today though abroad the important day Friday, the 23rd of August. It's the Jackson Hole symposium. What impact could this have on emerging markets?
Alan Wilson
Yeah, it's interesting. Really. It seems to be always the case with the Jackson Hole symposium always follows a crucial juncture for the financial markets. And it's the same again, this time round. I would say that most of this week, the markets have been. A little bit sideways.
They've been waiting with a baited breath for Chair Powell's speech at three o'clock today. And we think that the guidance is largely going to shape the financial markets over the coming weeks and months. And our thinking the the guidance is likely to be in tune with the FOMC meeting minutes that we had published this week. Powell is likely to outline the case for the first US rate cut since the beginning of 2020, by acknowledging that the balance of risks of shift from the inflation fate back towards the other side of its dual mandate, which is growth. We had the downside surprises to the ISM and the non-farm payroll that really stocked fears of a hard-landing in the US. We don't think the Fed is going to go there. We still think it's going to be a soft landing for growth in the US. And for EM it's much like the Goldilocks and the three bears fairytale in the growth calibration.
The US is not too hot. We don't have exceptionalism in the US anymore. I don't think it's too cold. We don't have a hard landing in the US, but we think it may be just right. So we have slowing growth in the US, a Fed that's probably been shaken out of its slumber now; it's probably going to be a bit more activist, and we hope that Powell will convey some of that at Jackson Hole today. So all in all, we think that we'll have a lower Fed funds rate, even more so than what's placed in the strip at the moment. A continuation of the rally and global bond yields. A softer dollar under reach for EM carry.
Matt Jones
Fantastic. No doubt all eyes will be on Jackson Hole at a, at three o'clock today. Now as is our tradition. Let's turn our eye to the week ahead. So within the emerging markets complex, what are you going to be keeping your eye on in the week ahead?
Alan Wilson
Yeah there's a lot on the plate this coming week. So this year we've discussed a lot about the push and pull factors at play for EM. The biggest push factor is what's happening at the Fed and the Fed easing cycle. So we'll get a lot more information about that hopefully at the Jackson Hole symposium today. But I think as we move into next week, we'll get a lot more information on the pull factors. In our view, capital should be drawn back towards the EM, as inflation continues to collapse in EM. But also as the local easing cycles, accelerate. So this coming week, will provide a useful temperature check on those themes. So, on Monday, it's pretty quiet, but on Tuesday, we will have the Brazil inflation print for August. Over recent months, Brazil has suffered a reversal in the post pandemic disinflation process, the price pressure has spiked up to a five month high and this has sparked a quite public political standoff between the COPOM governor Campos Neto and President Lula, who has been calling for lower rates. We think that this has led to fears over the independence of the Central Bank. So we'll be interested to see what this inflation print does for that dynamic.
On Wednesday, we have the National Bank of Hungary meeting, so the market has an expectation of a 25 basis point cut to six and a half per cent. The national bank of Hungary is that a bit of a crossroads at the moment, the easing cycle has been one of the most aggressive in the EM. They've cut rates by about six and a half percent over the last year or so. But at the same time inflation started to pick up towards the upper limit of their tolerance band, so it will be interesting to see how they thread that needle. Will they continue with the easing cycle or will they have one eye on the upside inflation surprises that they've seen recently?
On Wednesday, we head to South and we'll get probably a bit more information on the disinflation process there. We have the PPI data for July. And then we know that the SARB has been really patient and really credible, actually. They've had some bottom up underlying inflation pressure in South Africa, so they've held off where other EM Central Banks have began the easing cycle. Inflation has started to drift lower in South Africa, and I'd say that the narrative from the SARB has become a little bit more dovish.
So be interesting to see if we get a little bit more dovish support for the Central Bank and any emphasis towards the easing cycle starting towards the end of this year in South Africa.
And on Friday we have another inflation temperature check in CEE. We have the Hungarian PPI for July and the Polish CPI for August.
So as I just noted, there has been some signs of a bit of upward price pressure in CEE, we know the Central Banks there have been among the most aggressive in EM in terms of their easing cycle. So again, these data points will provide us with some more guidance about the direction of travel there.
Matt Jones
Fantastic a lot to be looking out for in the week ahead. Thank you for joining us and for outlining your thoughts on the week ahead. And I will be catching up with you again next week as Neil will still be off.
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