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Falling Oil Prices Are Becoming an Emerging-Markets Catalyst

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(Bloomberg) -- Falling oil prices are fast becoming a catalyst for emerging markets.

Last week’s slide in crude was partly behind the weakness in the Russian ruble, Mexican peso and Malaysian ringgit, according to Societe Generale SA. With oil wallowing in a bear market, OPEC and its allies started laying the groundwork to cut oil supply in 2019 in a meeting in Abu Dhabi on Sunday.

“Oil-importing emerging economies’ currencies would likely react negatively to a cut in OPEC output given Iranian oil exports are already likely to wane over time under the impact of U.S. sanctions,” said Mansoor Mohi-uddin, the Singapore-based head of foreign-exchange strategy at NatWest Markets. “In contrast, if oil prices fall it will benefit the currencies of major oil-importing emerging markets including the Indian rupee and Turkish lira.”

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The outlook for oil, a key source of revenue for Russia and Saudi Arabia, is adding a fresh twist for a market already obsessed with Federal Reserve tightening and the U.S.-China trade dispute. The prospect of any breakthrough on trade took a knock Friday when White House trade adviser Peter Navarro warned Wall Street not to pressure President Donald Trump into a quick deal.

Read more: U.S.-China Talks Highlight Deep Divide Before Trump-Xi Meeting

On the domestic front, there’s a chance Mexico’s central bank will increase interest rates Thursday after the peso clocked up its sixth weekly loss. Policy makers in Thailand, Indonesia and the Philippines will likely leave their benchmark rates unchanged, thanks to gains in the rupiah and the peso, according to ING Groep NV.

The ruble led a retreat in emerging-market currencies last week after the Fed signaled it will keep raising rates, making Wednesday’s release of U.S. consumer-price data the next pointer for monetary policy.

Read More: Financial Conditions to Fuel EM Factor Returns in 2019

Oil Matters

  • Oil futures climbed on Monday after a record run of losses as Saudi Arabia said it will reduce crude sales in December and speculation rose that OPEC and its allies will cut output next year. Futures tumbled into a bear market Thursday, and Brent crude dipped below $70 a barrel on Friday for the first time in more than six months, as fears of a production crunch and $100-a-barrel crude through the summer morphed into talk of a glut
  • Adipec conference starts Monday in Abu Dhabi, with hundreds of oil executives and government officials attending, following OPEC/non-OPEC committee meetings over the weekend
  • OPEC releases its monthly report Tuesday, the same day as IEA’s World Energy Outlook 2018. IEA follows up on Wednesday with its monthly Oil Market Report

Mexican Move

  • Banks including JPMorgan Chase & Co. expect policymakers to boost the key rate from a nine-year high of 7.75 percent
  • The peso, stocks and bonds have come under pressure since incoming President Andrews Manuel Lopez Obrador scrapped a partially built $13 billion airport and a lawmaker from his party unexpectedly proposed abolishing some bank commissions. Lopez Obrador later assured investors he won’t make changes to banking laws, sparking a rebound in Mexican assets
  • The peso’s “high carry and good value” will be anchors in the long run “as the incoming administration’s bumpy takeoff continues,” Goldman Sachs Group Inc. strategists including New York-based Zach Pandl wrote in a Nov. 9 report. “That carry is likely to move higher” with an increased likelihood of a rate hike

Asia on Hold

  • Most economists expect policymakers in the Philippines, Indonesia and Thailand to hold rates this week
  • The Philippine peso was Asia’s best performer in October and has extended those gains in November, while Indonesia’s currency has taken that crown so far for this month
  • Bangko Sentral ng Pilipinas, which meets on Thursday, last raised the policy rate in September, taking the increase to 150 basis points in just over four months. Inflation in the Philippines remains at an almost decade high
  • Bank Indonesia has hiked 150 basis points since mid-May. It kept its benchmark rate unchanged at the October meeting. Foreign funds have been buying the nation’s assets in recent weeks
  • Read more: Indonesian Bond Revival May Herald Beginning of End for EM Rout
  • In Thailand, a surprise drop in exports and manufacturing, fizzling tourism growth and slower-than-expected inflation have undercut the case for the first rate increase since 2011

Brazil’s Central Bank Chief

  • Brazil’s President-elect Jair Bolsonaro may name more cabinet members, and possibly a new central bank chief
  • Investors are calling for current head Ilan Goldfajn to stay in the job. Efforts at fiscal overhaul or the formal granting of autonomy to the central bank this year, earlier than expected, may also drive prices
  • The real slipped 0.2 percent this month through Friday, the worst performer among peers after Russia’s ruble

Lebanon’s Deadlock

  • After months of talks, efforts to form a new cabinet in Lebanon hit a new roadblock when Iran-backed Hezbollah insisted on allotting a ministerial portfolio to a Sunni Muslim not allied with Prime Minister Saad Hariri, the head of the largest Sunni bloc in parliament
  • Lebanon has been without a government since May, when the country held its first legislative vote in nine years. A Christian party last month agreed to take part in a future government, removing away a major hurdle to the announcement of a new government
  • READ: Hariri to Speak on Lebanon Government Formation on Tuesday
  • The country’s five-year credit-default swaps were at 700 basis points on Friday, after climbing above 800 basis points in September, the highest level since 2008

Nigeria’s Bond Roadshow

  • Nigeria may tap the Eurobond market for the second time this year. Africa’s biggest oil producer starts a three-day roadshow with fixed-income investors on Monday. The nation’s Senate last month approved President Muhammadu Buhari’s request to issue $2.8 billion of external debt
  • Read more: Nigeria Plans Eurobond Sale This Month: Reuters
  • Read more: Nigeria’s Senate Approves $2.8 Billion Eurobond-Sale Request

Upcoming data:

Monday, Nov. 12 India Industrial production
Turkey Current account balance
Tuesday, Nov. 13 Czech Republic Current account
Poland Current account, trade
Russia GDP (may be on Wednesday)
Brazil Retail sales
Wednesday, Nov. 14 China Retail sales, industrial production
India Wholesale prices
Thailand Monetary policy meeting
South Korea Unemployment rate
Czech Republic, Hungary, Poland GDP
Poland, Bulgaria, Ghana CPI
South Africa Retail sales
Colombia Retail sales, trade balance
Thursday, Nov. 15 India Trade balance
Indonesia Monetary policy meeting, trade balance
Philippines Monetary policy meeting, overseas workers remittances
Turkey Unemployment, Budget balance, Foreigners’ bond/stock investments, Expected inflation
Russia Gold/FX reserves
Egypt Monetary policy decision
Mexico Monetary policy meeting
Argentina National CPI
Colombia GDP
Friday, Nov. 16 Malaysia GDP
Thailand Foreign reserves
Turkey Industrial production
Russia Money supply
Czech Republic PPI

--With assistance from Alec D.B. McCabe and Dana Khraiche.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Robert Brand in Cape Town at rbrand9@bloomberg.net

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

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