Emerging market investors braced for another roller-coaster week on Sunday as US lawmakers appeared set to pass a $700 billion financial rescue package in the coming days but analysts said the world economy could still face a deep economic downturn.
Even if the Washington bailout succeeds in calming down financial markets, investors should remain averse to risky assets in the medium-term, while the global credit crisis takes its toll on the real economy. “Once the package is passed, markets will likely rally for a few days before the focus moves back to the economy,” Beat Siegenthaler, chief strategist for emerging markets at TD Securities, wrote in a research note. “We think emerging markets assets will then be driven by the weaker global growth outlook,” he added.
Emerging markets posted losses last week as uncertainty about the approval of Washington’s bailout package persisted. The Morgan Stanley’s MSCI index for emerging equity markets .MSCIEF fell 2.6% while emerging debt spreads over US Treasuries widened 24 basis points on the JPMorgan EMBI+ index 11EMJ. US Congressmen finalized the bailout deal on Sunday, which includes the creation a $700 billion government fund to buy bad debt that has been choking the financial system, but a timetable for the vote was still uncertain.
Once financial markets are stabilized, analysts say, countries will still have to deal with a slowing global economy, which may lower the price of commodities that have been supporting trade surpluses in many emerging nations. But the impact of lower commodity prices will not be the same in different emerging markets, TD Securities’ Siegenthaler said.
While big commodity exporters such as Brazil and Mexico are expected to struggle, Turkey and South Africa should benefit from lower energy prices, which would lead to lower inflation and possibly rate cuts, he explained. With eyes turned mainly on Wall Street, investors will have little important data to monitor this week in domestic markets.
Hungary’s central bank will hold a monetary policy meeting on Monday, when it is expected to keep base rate on hold at 8.5%, according to a Reuters poll. Thai and Brazilian central banks will publish important inflation reports and various countries will release a first round of figures for inflation and activity in September.
In general, inflation is expected to have subsided, Barclays Capital Research said in a note to clients, “due to some combination of lower food (eg. Colombia) or energy (eg. Korea, Thailand) inflation, with still-high prints in robust economies like Indonesia and Peru.” (Reuters)