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Argentine Stocks Plunge 9 Percent on Trade Fears

Argentine Stocks Plunge 9 Percent on Trade Fears

Thursday, 28 June 2018 09:50 AM Current | Bio | Archive

Emerging Markets

Argentina’s benchmark Merval stock index closed down 8.8 percent on Wednesday, which was its worst daily performance since early 2014, as concerns about trade tensions between the United States and China prompted a selloff across emerging market assets.

The Merval touched its lowest level since November 2017 and has now erased its gains from last week, when stocks rose on MSCI’s announcement that it would upgrade Argentina to its emerging markets category, from frontier markets previously.

Emerging markets tanked with the MSCI Emerging Markets ETF extending its recent downward spiral, taking its decline over the past month to 6 percent, and tumbling 10 percent from its closing high in Q1 of this year as confusing signals on global trade kept coming from the White House, which yesterday appeared to step back from an all-out confrontation with China, only for the Director of the National Economic Council Larry Kudlow to later say that President Trump wasn’t softening his stance.

Emerging market assets were already under pressure from the Fed’s interest rate hiking cycle, which is taking place faster than initially expected this year. The tightening policy is supporting the dollar, which has appreciated by 5.4 percent this year on an index benchmarked against a basket of currencies.

It might be helpful for investors taking note of what the World Bank said in its latest global economic outlook: A broad-based increase in tariffs worldwide would have major adverse consequences for global trade and activity. An escalation of tariffs just up to rates defined as legal by the World Trade Organization (WTO) could choke off 9 percent of global trade flows, similar to the drop seen during the financial crisis in 2008 and 2009. The hardest-hit areas in the event of increased protectionism would be emerging markets and developing economies, with sectors like agriculture and food processing the hardest hit.

Germany’s Migration Troubles

German Chancellor Merkel has told German MPs in the German Parliament (Bundestag) this morning that migration has become a “question of destiny” for the European Union (EU.)

The Chancellor is under increasing pressure at home from her conservative allies in Bavaria, the Christian Social Union (CSU).

She said that 2 points of a 7-point plan being hashed out with European partners at the 2-day EU Summit that also starts today, remained controversial and would need to be resolved over the next 2 days.

One of these points, she said, was the EU directive on granting and withdrawing international protection, where members still needed to find common standards for providing asylum.

The other point of contention is the reorganization of the so-called Dublin procedures, which regulate where asylum applications have to be dealt with, and how asylum-seekers are distributed across the bloc.

Merkel said that asylum-seekers in the EU "should not be able to choose" in which EU country they apply for asylum.

The German Chancellor concluded: “Europe has many challenges, but migration could become an existential question.”

Of course, financial markets keep a worrying eye on how all this evolves.

US-China Relations

Defense Secretary James Mattis had a meeting with President Xi Jinping in Beijing, the first such visit by a US defense chief in more than 4 years. President Xi said: “Our stance is steadfast and clear-cut when it comes to China’s sovereignty and territorial integrity. We cannot lose one inch of territory passed down by our ancestors. Meanwhile, we want nothing from others.”

This appeared to be a clear reference to US complaints about Chinese military deployments in the disputed South China Sea.

Today’s meeting also illustrates how disputes between the US and China extend well beyond President Trump’s plans to slap tariffs on Chinese goods and restrict China’s investments.

It’s also a fact that Trump still needs Xi’s help to keep North Korea engaged with disarmament talks.

US Q1 GDP (3rd estimate)

The U.S. economy slowed more than previously estimated in the first quarter amid the weakest performance in consumer spending in nearly five years, but growth appears to have since regained momentum on the back of a robust labor market and tax cuts.

Gross domestic product increased at a 2.0 percent annual rate in the January-March period, the Commerce Department said on Thursday in its third estimate of first-quarter GDP, instead of the 2.2 percent pace it reported last month.

The only certain thing about ‘early’ GDP data is that it is wrong, and indeed over time it has become increasingly likely to be wrong.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Emerging market assets were already under pressure from the Fed’s interest rate hiking cycle, which is taking place faster than initially expected this year.
gdp, economic, emerging, markets
Thursday, 28 June 2018 09:50 AM
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