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Don’t Be Fooled by the Calm in Emerging Markets. Risks Remain

Netty Ismail, Simon Flint, Sydney Maki and Robert Brand

(Bloomberg) -- Months of concern over rising Covid-19 infection levels may be secondary for investors in coming days as market-moving events and policy decisions take center stage.

China’s annual National People’s Congress starting Friday will likely keep volatility suppressed for developing-nation currencies, despite the prospect of another flareup in tensions between Beijing and Washington. JPMorgan Chase & Co.’s measure of implied volatility declined over the past three weeks as history suggests the People’s Bank of China will do what it can to ensure a calm yuan-trading environment during the meeting.

Elsewhere, central banks in South Africa, Turkey, Indonesia and Thailand are forecast to cut interest rates again, potentially diminishing carry-trade returns from investments in their currencies. As distressed-debt levels rise across developing economies, Argentina may officially fall into default if the South American nation fails to reach a $65 billion restructuring deal with bondholders by Friday’s deadline.

“There are undeniably still plenty of risks out there,” said Trieu Pham, an emerging-market strategist at ING Groep NV in London. “I continue to remain concerned about emerging-market external vulnerabilities, which would be in the spotlight again if EM currencies come under pressure.”

That’s not to say the coronavirus is far from people’s minds after the Federal Reserve issued a warning Friday that stock and other asset prices could suffer significant declines should the pandemic deepen. Fed Chairman Jerome Powell, who called last week for more government action to prevent lasting economic harm from the virus, will testify before Congress on Tuesday.

Listen: EM Weekly Podcast: Powell Warning, Rate Decisions, China NPC

Stable Yuan

Investors will be looking for China’s Congress to signal a stimulus boost at the annual meetingThe past seven annual sessions saw the offshore yuan rise on five occasions, while the official fixing was kept stable

Rate Cuts Galore

South Africa’s Reserve Bank is predicted to cut its policy rate by 50 basis points to a record 3.75% on Thursday, according to the median estimate of economists in a Bloomberg surveyForward-rate agreements are even more dovish, pricing in almost 60 basis points. The central bank has already slashed the repo rate by 200 basis points since the start of the coronavirus-related sell-off in March, and Governor Lesetja Kganyago said earlier this month it has room to do more as inflation expectations diminishAfter surprising investors with a larger-than-expected rate cut of one percentage point in April, Turkey’s central bank is seen cutting the one-week repo rate by another 50 basis points to 8.25%, also on ThursdayWith inflation cooling due to lower oil prices and a slower economy, policy makers will probably see few hurdles to further easing, though the lira’s volatility may count in favor of cautionIndonesia’s central bank will probably lower its benchmark by 25 basis points on Tuesday. The market will also look for confirmation of Bank Indonesia’s view that the rupiah remains undervalued and its pledge to keep supporting both the nation’s currency and bond marketsThe rupiah has outperformed this quarter -- gaining almost 10% -- due in large part to the governor’s explicit reassurances of official support

Bank of Thailand is expected to cut rates by a further 25 basis points on Wednesday

Local bond markets have rallied amid slowing inflation and are likely to continue to be supported by rate cuts. The country also releases April trade numbers on FridayChina’s central bank is expected to keep prime rates unchanged Wednesday, according to Bloomberg Intelligence, although there’s the possibility of a cut in the reserve requirement in the near future. This may offer support to local bonds -- after 10-year yields have jumped 18 basis points this month, the worst performance in AsiaZambia’s central bank, facing inflation at a 43-month high and a currency that’s lost more than a fifth of its value, will decide on Wednesday between raising the policy rate in attempt to stabilize the economy or providing relief by leaving it unchangedSri Lanka will also decide on interest rates on ThursdayRead: Sri Lanka Bonds Win Fans After Becoming Worst in Asia

Argentina Gets New Proposals

Argentina’s largest creditors sent Alberto Fernandez’s government new counteroffers in an effort to reach a restructuring agreementBondholders have until Friday to strike a deal. The deadline aligns with the due date for $500 million of delayed interest payments. Failure to reach an agreement or pay the cash by that date would result in Argentina’s ninth defaultOn the macro front, a reading of Argentine economic activity in March, set for Wednesday, will reflect early risks of the virus

Data and Events

Malaysia’s first parliament sitting since its chaotic change of government two-and-a-half months ago was confined to listening to the king’s speech. It left no time for representatives to discuss policies for addressing the pandemic or go through a planned confidence vote against Prime Minister Muhyiddin Yassin. It comes after Ahmad Zahid Hamidi, chairman of the ruling coalition Barisan Nasional, said it will provide undivided support and confidence for Muhyiddin. An easing of the political risk in the country, which was blamed for dragging Malaysia stocks into a bear market, may help support the country’s assetsMalaysia’s April CPI is due on Wednesday. A Bloomberg survey sees prices falling 1.6%. Across Asia, inflation readings came in below expectations for April, providing significant support for bond prices in May

Thailand sees its economy contracting as much as 6% this year, among the worst in Asia, as the coronavirus outbreak cut off travel to the tourism-reliant nation and shuttered commerce

GDP shrank 1.8% in the first quarter from a year ago, the first contraction since 2014. That compares with the median estimate for a decline of 3.9% in a Bloomberg survey of economistsThe baht has reversed some of its earlier losses to become one of Asia’s top-performing currencies this quarterTaiwan’s April export orders, due on Wednesday, are expected to contractSouth Korea’s 20-day exports for May, due on Thursday, are predicted to show a further decline, after dismal 10-day export numbers. Korean exports are considered a leading indicator for global economic activity and a serious shortfall may have a negative impact on broader market sentimentRussia’s economic growth is predicted to slow to 1.8% year-on-year in the first quarter, from 2.1%, according to estimate before the data is due Tuesday. That’s the first reading to start showing the impact of plunging oil prices and the coronavirus pandemicA heavy data week in Poland will start to show the hit from the pandemic, with core CPI data for April on Monday, followed on wages and employment numbers on Wednesday, PPI and industrial output on Thursday and retail sales and construction growth on FridayMexico will begin to reopen its economy on Monday, starting with automobile, mining and construction companies. Inflation figures for the first part of May, to be posted on Friday, will probably remain subdued amid weak demand, according to Bloomberg EconomicsInvestors are now net short Mexican peso for the first time since December 2018, CFTC data showChile’s economy is bracing for a sharp contraction ahead, even after activity unexpectedly grew in the first quarter. Investors will watch central bank meeting minutes on Friday for clues on how policy makers are considering the risks of the pandemicPeru will probably report a shrinkage in GDP for the first quarter as the outbreaks and lockdown measures throttled economic activity. The release date hasn’t yet been set

(Updates with Chile’s GDP in second to last bullet.)

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