The standoff between the United States and China is back at the top of emerging-market investor concerns as they assess how far they should price in a full-blown trade war.
China said Monday it will raise tariffs on some US goods starting June 1, ignoring a warning from US President Donald Trump that the trade stand=off will “get worse” if there is retaliation for the latest increase of US duties. The emerging stalemate in trade negotiations reflects widening differences that are unlikely to be resolved soon, with the world’s two largest economies deadlocked over how and when to remove existing US tariffs.
Expected swings in developing-nation currencies, a barometer of investor nerves, rose Monday, after jumping last week by the most since August as markets see-sawed on each twist and turn in the stand-off. Emerging-market stocks and currencies slumped to the lowest level since January.
“We are increasingly sceptical that any meaningful agreement or even progress will be made in the near future,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., which reduced its investments in emerging-market credit as tensions rose. “Bonds have not really priced-in the complete collapse of US-Sino trade talks.”
Central banks in Indonesia, Mexico and Poland are set to hold policy meetings this week, with all three forecast to keep interest rates on hold as the external volatility rises.
Unlike their counterparts in Malaysia and the Philippines, policy makers in Indonesia are likely to prioritise keeping the rupiah stable rather than supporting growth, after the rupiah fell to a four-month low last week; Bank Indonesia will probably keep the policy rate unchanged on Thursday amid renewed trade tensions between the US and China.
“Indonesia’s Central Bank doesn’t seem ready to join in the easing cycle just yet,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note dated May 10.
Mexican monetary authorities will probably keep interest rates on hold and maintain a cautious tone when they meet on the same day. High inflation and greater external volatility reflect risks that may offset arguments for a less hawkish tone following weaker first-quarter economic growth.
Economists expect Poland’s Central Bank to maintain its key rate on Wednesday even after inflation accelerated in April to the highest in a year and a half.
Argentine inflation, Malaysian GDP
Traders face another moment of truth when Argentina reports inflation data for April on Wednesday. The peso leads global losses in 2019 and inflation is running above 50 percent year-on-year. Bringing it down is one of the most pressing challenges for Mauricio Macri’s administration.
Brazil’s economic activity figures from March, due on Wednesday or Thursday, risk confirming analysts’ concern of a contraction in the first quarter. Meantime, the long slog continues in Congress for the all-important pension overhaul bill, as the lower house’s special commission holds new hearings.
With the lira underperforming its peers this quarter, Turkey’s industrial production and unemployment data will be in focus. Its annualised current account deficit narrowed to the lowest level in nearly 10 years, a positive result of the nation’s recent economic slowdown, according to Bloomberg calculations using the Central Bank figures.
Turkish banks were selling dollars and buying lira in Asia last week to support the local currency.
“Until something fundamentally changes for the better, Turkish assets will remain under pressure,” Win Thin, the New York-based global head of currency strategy at Brown Brothers Harriman, wrote in a note. “Turkey has very limited foreign reserves and cannot intervene on a regular basis”
The Treasury and Finance Ministry is contemplating whether to tap the Central Bank’s so-called reserve funds to borrow about 40 billion liras (US$6.5b), Reuters reports, citing three officials it didn’t identify.
Malaysia reports first-quarter GDP on Thursday. Its Central Bank cut its benchmark rate last week for the first time since July 2016 as the Southeast Asian nation braces for slower growth amid weaker global demand and rising trade tensions. The Central Bank is forecasting expansion of 4.3-4.8 percent this year, while the government is targeting 4.9 percent growth in 2019, compared with 4.7% last year.
The Philippines holds its mid-term elections on Monday to elect new lawmakers and local government officials. The entire lower house of Congress and half of the Senate will be up for re-election, but there will be no change in the presidency, whose current term ends in three years