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ECONOMY | 05-08-2019 12:34

Agility is the watchword as trade tensions jolt emerging markets

The Chinese yuan fell to 7 against the US dollar as the global stock index has lowest close since January.

The trade war is taking a turn for the worse just as investors digest one of the roughest weeks for emerging markets this year.

China responded to Donald Trump’s latest tariff threat by asking state-owned enterprises to suspend imports of U.S. agricultural products and letting the yuan slide past 7 to the dollar to the weakest level in more than a decade. The U.S. president called the move “currency manipulation” and indicated the Federal Reserve should respond. Trump last week threatened to put 10% tariffs on a further $300 billion of Chinese goods. The latest showdown puts the Asian nation’s trade data on Thursday in the spotlight amid concern the year-long dispute is hurting its economy.

“The risk to emerging-market assets in the near term is skewed to the downside,” said Patrick Wacker, a fund manager at UOB Asset Management Ltd. in Singapore who locked in some profit ahead of the Fed’s decision. “With assets having to price in more risk for global growth and trade policy, we do not believe right now is the best time to add bonds most sensitive to market swings.”

Emerging-market currencies headed for their biggest decline since June 2016, while stocks dropped to the lowest since January on a closing basis. Assets have been under pressure since last week after the Fed, while cutting rates for the first time in more than a decade, stopped short of signaling it was the start of an aggressive easing cycle. Morgan Stanley turned bearish on emerging-market credit soon after removing a bullish call on currencies, while Citigroup Inc. said it’s time to cut risky wagers. 

The drop in the yuan is expected to put quite a sharp downward pressure on currencies of economies with deep ties with China such as the South Korean won and Taiwan dollar, while the Indonesian rupiah and Indian rupee are expected to remain more resilient, according to Tsutomu Soma, general manager of the investment trust and fixed-income securities at SBI Securities Co. in Tokyo.

The central banks of the Philippines and India are forecast to lower ratesthis week, and South Korea is preparing to announce details of a plan to remove Japan from its easy-trade list as the countries’ political standoff intensifies.

“This once again shows that it’s foolish to make long-term predictions on markets and anchor positions to predictions,” said Nader Naeimi, AMP Capital’s head of dynamic markets in Sydney. “I can’t remember any other time that agility and flexibility was so paramount.”

Trump Thumps China

  • The Trump administration is expected to publish in “days” the final list of Chinese goods subject to the new 10% tariff effective Sept. 1
    • Beijing won’t seek competitive depreciation or use its currency as a tool to cope with the trade dispute, PBOC Governor Yi Gang said in statement on website
  • China’s exports and imports likely fell in July from a year earlier, dented by higher U.S. tariffs

More Rate Cuts

  • Almost of all the economists surveyed by Bloomberg forecast the Reserve Bank of India will cut the repurchase rate by 25 basis points to 5.5% Wednesday, after having eased three times so far this year
    • The rupee was the worst-performing emerging-market currency as the government revoked the special constitutional status of Kashmir in a move that risks worsening its already fraught security relationship with rival Pakistan in the disputed region
  • Consensus is that the Philippine central bank will reduce its key rate by 25 basis points, its second cut this year
  • Peru’s central bank may consider cutting its benchmark rate on Friday after officials signaled additional stimulus is an option amid weaker-than-expected economic growth and tame inflation
  • Thailand is set to keep rates on hold Wednesday
  • Read more: Yuan’s Slump Puts Asia’s Rate-Cutting Central Banks on Alert

Brazil’s Pension Overhaul

  • Congress returns from a two-week recess to hold a second-round vote on President Jair Bolsonaro’s flagship pension overhaul
  • Brazil’s central bank minutes are due for release on Tuesday after the country kicked off a monetary-easing cycle on July 31. The real has outperformed all Latin American peers except Mexico’s peso so far this quarter
  • The nation will release inflation data and June retail sales, which will signal whether the country tipped into a recession


Economic Highlights

  • The lira strengthened on Monday. Data showed a slowdown in Turkish inflation took a pause in July as the government rebuilds its coffers with higher taxes while the central bank loosens monetary policy
    • Consumer prices rose 16.7% from a year earlier after a three-month deceleration
  • Indonesia’s economic growth was little changed in the second quarter, with gross domestic product rising 5.05% from a year ago. The Bank Indonesia governor previously linked future monetary-policy easing to the domestic growth outlook
  • The Philippines will report GDP data on Thursday, before the central bank rate decision
  • Investors will be eyeing trade numbers from the Philippines and Taiwan due Wednesday
  • Colombia will publish CPI data on Monday, Taiwan and the Philippines on Tuesday
  • Argentina is set to release construction and industrial statistics on Tuesday that may provide evidence of the economy’s recovery. The figures will be published before a key primary vote for the presidential election on Tuesday
  • June economic activity data in Chile, due on Monday, may support the case for a rate cut in September by the central bank

– BLOOMBERG

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