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ECONOMY | 06-05-2019 12:58

Trade war back on the radar for emerging markets as dollar lurks

As Trump makes global waves with pointed remarks on China trade talks, a spate of country-specific events will divert market participants from their obsession with the dollar this week.

Emerging-market traders have been jolted back to reality this week after US President Trump reminded markets that a trade deal with China isn’t finalised yet.

Trump over the weekend increased the pressure on China to wrap up a trade deal with a threat to levy new tariffs on the country’s goods. Investor anxiety, as measured by the offshore yuan’s one-week implied volatility, was headed for the biggest increase since the aftermath of China’s shock devaluation of its currency in August 2015.

“Markets are considering on the possible breakdown in US-Sino trade talks,” said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. “President Trump has seriously raised the stakes in this week’s round of the US-China trade talks in Washington.”

A spate of country-specific events will also divert market participants from their obsession with the dollar this week. Centre-stage is South Africa’s May 8 election, which may determine whether President Cyril Ramaphosa can deliver on pledges to revive the US$350 billion economy. The rand is starting to swing ahead of the vote: the currency’s implied volatility had the biggest jump in emerging markets last week.

Elsewhere, interest-rate decisions from at least seven central banks will concentrate minds, with Malaysia and the Philippines set to ease in the wake of the US Federal Reserve’s message of patience last week. Just as China’s stock markets were opening, the People’s Bank or China announced it would inject 280 billion yuan (US$41 billion) of longer term funds by lowering the proportion of deposits smaller banks need to lock away.

Adding to the mix, Turkey’s top electoral body will decide whether to nullify the result of Istanbul municipal election as President Recep Tayyip Erdogan’s ruling party fights to regain control of the city. And there will also be attention closer to home, when Argentina releases data on construction and industrial production, with President Mauricio Macri trying to shore up support ahead of the October election.

Investors will be watching for “the impact on risk sentiment from the events above as well as the movement of dollar against emerging-market currencies, which will be the turning point” for the market, said Esther Law, a London-based senior investment manager at Amundi Asset Management who, though cautious in the near term, still sees value in select emerging-market bonds and currencies following their recent sell-off.


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by by Netty Ismail, Lilian Karunungan and Justin Villamil, Bloomberg

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