US-China trade risk keeps EM investors on edge

Developing-nation currencies seen depreciating about 2%

Emerging markets are once again at the mercy of the US-China trade war after investors spent an exhausting August pivoting between disappointment and optimism for a truce.

After one of the most painful months for emerging markets (EM) in years, traders will be watching for what comes next – and also for signals that the Federal Reserve can foster global growth.

Last month proved disappointing for money managers betting on rising stocks and stronger currencies amid trade tension and a resurgent US dollar. September may not be much better, with Argentina imposing capital controls amid a currency crisis.

“For EM prospects to improve, we would need to see the Fed turning more proactively dovish and/or trade tensions abating,” Morgan Stanley strategists including James Lord in London wrote in a note. “Neither of these outcomes seem likely for now.”

Morgan Stanley said it expected developing-nation currencies to depreciate about 2% against the greenback in the coming month.

The erratic US-China trade narrative was still in the spotlight as US tariffs on about US$110bil of Chinese goods went into effect on Sunday, as did Beijing’s countermeasures.

Data at the weekend showed a further deterioration in manufacturing output from the world’s No. 2 economy.

Argentina’s central bank set a limit of five days for exporters to repatriate foreign currency, while institutions will need need authorisation of the bank to buy dollars in the foreign exchange market, except in the case of foreign trade. Individual Argentines will be limited to dollar purchases of no more than US$10,000 a month.

“This will add to the volatility and will add to the confusion over what’s going on in Argentina,” said Andrew Brenner, head of international fixed income at Natalliance Securities in New York.

People have become more risk averse as the volatility increased all through the month of August when it came to EM, he said.

Yesterday, China’s Caixin Manufacturing PMI showed a surprise expansion to 50.4 in August compared with a consensus estimate of 49.8 and a reading of 49.9 in the previous month. A score above 50 signals expansion, while less than 50 a contraction.

The Caixin PMI’s surprise jump back into expansion shouldn’t be seen as a genuine improvement in China’s export sector as the latest wave of US trade-war tariffs will put more pressure on exporters, according to Chang Shu, chief Asia economist for Bloomberg Economics.

August PMI reported yesterday by China’s trading partners such as Taiwan, South Korea, and Indonesia indicate contractions, as trade uncertainty works its way up and down the value chain.

Malaysia’s trade numbers are due tomorrow, which will be one of the last key data points before Bank Negara’s monetary policy meeting on Sept 12. Meanwhile, South Korea will release final figures for its second-quarter GDP today.

Russia is expected to deliver its third-quarter-point cut in a row on Friday as inflation slows and the economy sputters.

While all but one of the 16 economists polled by Bloomberg predict a reduction to 7%, traders will be on the lookout for any hawkish signals after the ruble’s monthly slide.

In Chile, the central bank will probably carry out its second interest rate reduction in the past three months as growth stalls and inflation slows dramatically.

Inflation data are due from a slew of Asian countries. Thailand and Indonesia yesterday reported slower-than-estimated figures.

Brazil is expected to show a sustained decline of consumer price inflation in Friday’s reading of August data, which could increase the odds of another rate cut in mid-September.

Data in Colombia will probably show consumer prices picked up for a sixth month, leaving the central bank scant leeway to cut borrowing costs at its September meeting.

Turkey’s economy probably expanded 0.5% in the three months through June, from 1.3% the quarter before, data may show.

Traders will be bracing from a raft of data from South Africa. The country probably avoided its second recession since the beginning of 2018, data may show.

Gross domestic product probably expanded 2.5% in the second quarter, after contracting the quarter before, according to the median estimate in a Bloomberg survey.

The current-account deficit probably widened to 3.1% of GDP in the same quarter, from 2.9%, data may show on Thursday.

Source: Bloomberg 

Posted on : 03 September 2019
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Last Updated : Tuesday 12th November 2019