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Beyond geopolitics, EM’s coming exceptional election calendar is set to breed volatility

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

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.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

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Beyond elevated geopolitics that continues to spawn uncertainty, global markets will need to begin to contend with a mammoth election calendar across the EM space. Over the next 12 months, no less than 17 major EM elections will be held – the most in 19 years (when only 9 elections took place). This is an anomaly result of different electoral calendars all converging simultaneously. Granted, no two elections are the same and some elections generate less volatility than others but we view that this cycle may experience less policy discipline given the late cycle dimensions (higher for longer DM rates and strong US dollar) that continues to threatened EM risk appetite (that comes on top of the climbing forces of deglobalisation). On net, there may be convincing motivations for an overall looser EM fiscal stance during the upcoming elections but apprehensions between the velocity at which EM governments want to supply assets to the world juxtaposed against the velocity as which the world’s demand for EM assets grows, may breed volatility across global markets.

 

FX views

It has been a good week for EM currencies that have been one of the main beneficiaries from the dovish repricing of the outlook for Fed policy. The powerful relief rebound for EM currencies was initially triggered by the less hawkish Fed policy update that has since been followed up by the release of the much weaker than expected nonfarm payrolls report for October. The main downside risk for EM currencies would be if fears over a sharper US/ global slowdown intensified.

 

Trading views
It feels like the market finally got its wish with the data and Fed-speak giving once again an opportunity to jump on the Fed’s all done bandwagon. While this might be the third or fourth time the market is pricing such a turn in the Fed like all previous episodes it doesn’t seem the market has lost any enthusiasm in pricing such a scenario. The fact the very tightening financial conditions that caused the turn in the Fed’s thinking should serve as a measure of how far things can go but for now, does not seem to matter too much for now. Furthermore, taken the view that our starting point had many EM FX central bank’s actively working to support their currencies we would certainly agree with the markets initial view that from an asset class perspective EM FX provides a better vehicle to express this Fed turn than other asset classes.

 

Week in review

The Central Bank of Egypt (CBE) and Czech National Bank (CNB) held interest rates at 19.25% and 7.00%, respectively. Turkey’s October inflation came in at 61.4% y/y, lower than both our and market expectations. Q3 2023 GDP growth for Czech Republic came in at -0.6% y/y, leaving the country on the edge of another recession.

 

Week ahead

Rate meetings will be held in Poland (MUFG and consensus: 25bp cut to 5.50%) and Romania (MUFG and consensus: hold at 7.00%). Inflation data for October will be released in Czech Republic, Hungary and Russia. While we expect the October prints to be higher in Czech Republic and Russia, we expect inflation to continue in the disinflation process in Hungary.

 

Forecasts at a glance

In a world of tightening global financial conditions and questions about the liquidity implications of the now-finalised US debt ceiling, we see a degree of macro risks for EM economies in H2 2023, with external funding requirements the central concern. We expect EM growth to trough this year but remain below potential in the 2024 recovery. The silver lining is that subdued growth should cap inflation, facilitating monetary policy easing where external balances allow.

 

Core indicators

According to the IIF data, in the week ending 27 October, EM funds recorded the thirteenth consecutive week of net outflows (USD5.6bn).