Emerging-market investors are hoping for a reversal of fortunes after a brutal May in which the deepening trade war derailed a rally built on the outlook for easier Federal Reserve policy.
The MSCI EM Currency Index suffered its worst month since August, when the Turkish lira’s slide to a record low sparked contagion fears. As the confrontation between the United States and China extended to the technology industry, a measure tracking developing-nation shares snapped a four-month winning streak. And then, new fronts in the trade war opened as US President Donald Trump threatened to hike duties to 25 percent on Mexican goods and terminated India’s designation as a developing nation.
“Market appetite for absorbing negative growth surprises or further escalation in global trade tension is low,” Daniel Been, the Sydney-based head of FX research at Australia & New Zealand Banking Group Ltd. and Rahul Khare, a graduate analyst at the bank, wrote in a note on Friday. “We expect increased volatility and underperformance of risk assets to continue.”
The next catalyst for markets, and a clue to the trade-war fallout, may come from global manufacturing data due at the beginning of the month. China’s figures have already shown factories slowing more than expected. In Asia, most of data already showed continued weakness of factory sentiment led by South Korea’s where survey respondents complained of poor sales to China and Japan. Economies including Brazil and Russia are also due to report theirs later Monday.
The dollar and manufacturing data “are likely triggers for the next move in Asian markets, as markets price in a more prolonged trade dispute,” Credit Agricole CIB strategists led by Sebastien Barbe wrote on Wednesday. “We retain a slight long dollar bias against trade-exposed currencies.”
Meantime, Thailand, the Philippines and Taiwan are set to report inflation data, while South Korea will post its final first-quarter growth reading after the nation’s Central Bank last week kept the seven-day repurchase rate at 1.75 percent amid rising risks to the export-dependent country.
Trump’s tariff threat risks tipping Mexico’s economy into a recession, given the high exposure to trade with the US and little room for counter-cyclical economic policy. It also means Banxico can rule out an easing cycle anytime soon amid potential inflation pressure, according to BNP Paribas. Mexico will post inflation data for May on Friday.
The first major signs that Argentina is recovering from a recession may appear in construction and industrial activity data for April on Wednesday. But amid rising global risks, such as Brazil’s slowdown, the numbers could instead confirm fears of a delayed or weak recovery.
New inflation forecasts will also be closely watched after prices rose far less than expected in April. But growth forecasts, especially for the first quarter, are poised to be cut as activity fell sharply in March.
In Brazil, pension overhaul enters a key stage – the negotiation around a report by the lower house’s special commission. Representatives presented nearly 200 amendments, many of them targeted at removing changes in elderly income support and retirement rules for rural workers and teachers.
The rapporteur signaled that he intends to publish his brief by mid-month, meaning he’ll have two weeks to decide on proposed changes. The vote on the report, however, will likely happen only when the government and lower house speaker Rodrigo Maia are confident it has sufficient support to pass.
Modi Wins and now what?
As the euphoria from India Prime Minister Narendra Modi’s landslide election win fades, the focus shifts back to the nation’s economic fundamentals. The Reserve Bank of India is set to announce its monetary policy decision on Thursday. Economists surveyed by Bloomberg forecast the Central Bank will cut its key rate by 25 basis points to 5.75 percent amid weak growth and benign headline inflation.
South African recession?
A slew of data will give traders clues on the direction of Africa’s most industrialised economy. Of primary interest will be first-quarter GDP numbers on Tuesday, with economists predicting an annualised, quarter-on-quarter contraction of 1.6 percent. Manufacturing PMI and the business confidence index on Wednesday will provide further food for thought.
On Thursday, the Central Bank releases data on the current-account deficit, which probably widened in the first quarter. The week closes with foreign-exchange and gold reserves on Friday.
And these days, no week is complete without an Eskom Holdings-related story to worry investors: a labour union whose members contribute most to the funds overseen by South Africa’s state pension manager wants the institution to stop investing in the heavily indebted utility, increasing the company’s borrowing costs.
Russian officials, local billionaires and their foreign guests convene Wednesday for the St. Petersburg International Economic Forum. The caliber and quantity of overseas attendees has dwindled as foreign governments sanctioned Russia due to its annexation of Crimea and 2016 election meddling. US Ambassador Jon Huntsman said he’s boycotting the event to protest the Kremlin’s handling of the case against Michael Calvey, a prominent US fund manager.
After April’s surprise inflation pickup in Poland, price-growth data due on the eve of the Central Bank’s rate decision will have the potential to make a big splash in currency markets. While the forecast is that the record period of rates on hold will continue, traders will lap up any hints of a coming shift in the base rate.
– With assistance from Dana El Baltaji and Yumi Teso.
by by Ben Bartenstein, Tomoko Yamazaki & Robert Brand, Bloomberg