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The promised land(ing) in sight
EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp
SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@uk.mufg.jp
LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp
MUFG Bank, Ltd.
A member of MUFG, a global financial group
Macro focus
The latest US employment report was neither strong enough to price out the risk of a faster Fed cutting cycle, nor weak enough for the Fed to signal urgency to start with a 50bp cut, leaving market pricing stuck between the consecutive 25bp and 50bp cut scenarios. With a US soft landing our base case, what is clear in our view is that front-end as well as medium-term forward rates are seemingly too low for a non-recessionary outcome. From an EM perspective, we anticipate a low bar for disappointment with potential bumps on the road ahead in this “controlled descent” environment given burgeoning fiscal angst, alongside geopolitical and election-related apprehensions. Consequently, the hurdle rate to invest in EM remains high at the current juncture, and we recommend positioning cautiously into what is set to be a volatile end to 2024. As such, we continue leaning on a bottom-up micro stance rather than a top-down macro approach to bring diversification benefits to EM portfolios – making active portfolio management critical on a forward looking basis. We continue to recommend macro stabilisation markets (Poland and Turkey) and structural growth narratives (GCC region) within the EM EMEA region. We also believe that investors are increasingly becoming comfortable with two frontier markets owing to idiosyncratic developments – Egypt (external financing relief and credit upgrades) and Nigeria (return to orthodox macro policies).
FX views
Emerging market currencies have been boosted by building market expectations for the Fed to cut rates more quickly ahead of this week’s FOMC meeting. The worst outcome for emerging market currencies would be if the Fed only delivers a 25bps cut and pushes back strongly against the prospect of larger 50bps cuts in the near future as well, although we doubt the Fed would want to rule out such action. The HUF and ZAR have been the best performing EMEA currencies highlighting that emerging market carry trades are performing better ahead of the FOMC meeting.
Week in review
A host of inflation readings for August were released in Hungary, Czech Republic, Egypt, Romania, Russia and Israel. The Central Bank of Russia (CBR) unexpectedly raised its benchmark interest rate by 100 bps to 19.00%, against our (and consensus) expectations of 18.00%. Finally, S&P revised its outlook on Saudi Arabia to positive from stable (affirming its A/A-1 long-term foreign unsolicited sovereign credit ratings). The positive outlook reflects “the potential that the Saudi government's wide-ranging reforms and investments will underpin the development of the non-oil economy while upholding sustainable public finances”
Week ahead
In the week ahead, there will be rates meetings in Turkey (MUFG and consensus: on hold at 50.00%) and South Africa (MUFG and consensus: -25bps to 8.00%). Elsewhere, global markets remain squarely focused on the September FOMC meeting on 18 September – the post-meeting statement will be released at 2:00pm (Eastern Time), followed by Chair Powell’s press conference at 2:30pm (Eastern Time).
Forecasts at a glance
Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden for the remainder of 2024.
Core indicators
The latest weekly IIF flow data signalled that EM securities witnessed USD10.2bn of outflows in the week ending 6 September August. We reiterate that the relationship between EM currencies and Fed decisions are crucial – higher rates normally strengthens the US dollar, diminishing the appeal of EM currencies, which can lead to capital outflows and increased borrowing costs for EM.
