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Emerging Markets Grapple With Low Volatility Amid Rate-Cut Pause

Netty Ismail, Lilian Karunungan and Sydney Maki
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Emerging Markets Grapple With Low Volatility Amid Rate-Cut Pause

(Bloomberg) -- With little more than six weeks to the end of 2019, the signs are that the worst days of the year for emerging markets are in the past. But don’t bet on any major rally either.

Expected volatility is close to its lowest levels since 2014, stocks are failing to take their cue from bullish signals and a trio of central banks are poised to back away from stimulus-inducing rate cuts this week. That leaves markets largely hostage to the ups and downs of the trade talks, with the latest phone call between U.S. and Chinese officials on Saturday likely to trigger at least a bout of optimism at the start of the week.

“Emerging markets are a mixed bag for the moment,” said Anders Faergemann, a London-based senior money manager at Pinebridge Investments, which oversees about $97 billion worldwide. “We are taking a selective approach, treating each country as an individual credit and spending more time reviewing the economic fundamentals.”

Protests in Latin America, Lebanon and Hong Kong will also probably cause “some consternation” for emerging markets in the short term, according to Faergemann, who says he favors Ukraine and Egypt for their reforms, while staying on the lookout for “improving stories” in countries such as Ghana, Angola and Ivory Coast.

Stocks, currencies and bonds rebounded on Friday to trim last week’s losses after White House economic adviser Larry Kudlow signaled a trade deal was coming down to the final stages. JPMorgan Chase & Co’s implied volatility index for developing-nation currencies was at 7.3% Monday, near the five-year low of 6.9% reached in July.

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Whither Rates?

Traders were adding bets at the end of last week on a South African rate cut as the rand strengthened and oil prices moderated, even as most economists predicted that the central bank will maintain its benchmark on ThursdayThe five-year breakeven rate, seen as a gauge of expectations for price increases over the period, fell to as low to 4.42 percentage points on Friday, the lowest level since at least 2012, when Bloomberg started compiling the dataRead more: Record-Low Breakeven Rate Spurs South Africa Policy-Easing BetsPolicy makers in Indonesia will probably keep the benchmark rate on hold on Thursday after 100 basis points of cuts this year, according to a Bloomberg survey. Governor Perry Warjiyo said last month any further moves would depend on data. Economic growth eased to 5.02% in the third quarter, the slowest pace in more than two yearsThe rupiah is Asia’s best-performing currency this year after the Thai baht and Philippine pesoHungary will probably keep its benchmark interest rate unchanged on Tuesday. Zambia will decide on monetary policy the following dayRussia’s central bank chief will face questions from parliament on Wednesday on why she isn’t moving faster to cut rates amid sputtering economic growthRead: Best Days for Emerging Debt Could Be Over on Fewer Rate Cuts

Aramco Kicks Off Roadshow

Saudi Arabia put a preliminary valuation on its state-owned oil giant Aramco of between $1.6 trillion and $1.71 trillion, short of the $2 trillion target set by Crown Prince Mohammed bin Salman in 2016. Aramco said Sunday it plans to offer 1.5% of its shares on the local stock exchange, less than expectedThe Saudi Tadawul index swung between gains and losses Sunday to end the day little changedRead more: Aramco at $1.7 Trillion Gives Stock Room to Rise, Analysts Say

Sri Lankans Vote

A family of strongmen who tilted Sri Lanka toward reliance on China clinched victory in a tightly-fought presidential election, as voting showed the country remains divided down ethnic linesGotabhaya Rajapaksa, the brother of former president Mahinda Rajapaksa, won 52.3% of the votes. Ruling alliance candidate Sajith Premadasa had 42% at the final countThe yield premium investors demand to own Sri Lanka’s dollar bonds over U.S. Treasuries narrowed 47 basis points this year to 489 basis points as of Friday, according to a J.P. Morgan Chase & Co. index.

Economic Data

Argentine investors, still awaiting President-elect Alberto Fernandez’s economic policy plans, will be on edge this week as they digest trade balance data. The peso remains the world’s worst-performing currency of the yearIn Chile, where stocks and the peso rallied on Friday on optimism over a new constitution, third-quarter gross domestic product data on Monday will probably show a recovering economy, though some analysts have changed their outlooks since protests broke out in October. The week-ending rally was the first significant relief for Chilean assets after the government’s move to raise subway fares sparked unrestGDP figures for the same period in Peru on Thursday are also expected to flag some recovery, though growth probably remained below potential. The data may explain why the central bank unexpectedly cut interest rates this month and downgraded its growth forecast for the year, even though the peso gained over the course of 2019Thailand will also unveil trade figures for October on Thursday after a report Monday showed the nation’s economy grew more slowly than expected in the third quarter. The government lowered its forecast for full-year growth as the country deals with the impact of the trade war and a strong currencyOn Wednesday, the central bank will release minutes of its Nov. 6 meeting, when it cut its key rate to a record low and announced measures to curb the strength of the bahtFor the first time since 2015, China cut its seven-day reverse repurchase rate to 2.5% from 2.55% on Monday following a string of poor economic data. This will renew focus on the repricing announcement of its one-year and five-year loan prime rate on Wednesday. The LPR indicates the price that banks charge clients for loansSouth Korea is due to give an indication how its exports -- a bellwether for global trade - - are performing in November. Its 20-day reading on exports and imports will be released on ThursdayTaiwan will report data on export orders for October on Wednesday.Russia’s industrial production data will offer clues on whether the economy’s third-quarter rebound will be sustained in the last three months of the year

--With assistance from Karl Lester M. Yap, Alec D.B. McCabe, Marcus Wong and Tomoko Yamazaki.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Justin Carrigan, Dana El Baltaji

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