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Emerging-Market Investors Need More Than a Truce to Turn Bullish

Emerging-Market Investors Need More Than a Truce to Turn Bullish

Monday, 01 July 2019 08:32 AM

Emerging-markets are set to shift their focus to the outlook for global growth after a trade truce between the U.S. and China alleviated the immediate risk of a cold war between the two nations.

Investors welcomed President Donald Trump’s decision to put on hold new tariffs on Chinese goods and allow U.S. suppliers to sell some products to Huawei Technologies Co., but it’s still unclear whether Beijing and Washington can overcome their differences. While the easing of tension is positive for global growth and will reduce some of the urgency in central banks’ swing back to policy easing, existing tariffs and continued uncertainty will remain a drag, according to Bloomberg Economics.

“Given the meeting was light on details, heavy on Trump optimism, coupled with the Chinese comments being reserved and benign, EM currencies are unlikely to benefit from the new truce,” Jason Daw, the head of emerging-markets strategy at Societe Generale in Singapore, wrote in a report. “A substantial risk premium will remain in market pricing related to two negative growth scenarios: first, a long-term stalemate or, second, a no-deal outcome. From a tactical perspective, there is more likely to be a short-term pop higher” in the dollar versus Asian currencies, he said.

Data on Sunday and Monday showed the outlook for China’s manufacturing sector continued to deteriorate in June, highlighting the pressure from tariffs the U.S. imposed the previous month on Chinese goods. A slew of manufacturing data will be keenly watched by investors. Similar readings on Monday from the trade-dependent economies of South Korea and Taiwan followed the trend in China.

Emerging-market currencies and stocks jumped last month by the most since January, while local-currency bonds staged their best performance in more than three years following a dovish turn by the Federal Reserve and the European Central Bank. The U.S. jobs report on Friday will likely give clues on whether the Fed will cut rates on July 31 for the first time in more than a decade.

“Aside from trade-war newsflow, the primary drivers of EM currencies have been growth and liquidity,” Daw said. “Low rates could prevent meaningful currency weakness for a while longer, but if the delta on economic activity remains negative, growth should ultimately win out in the liquidity-growth tug-of-war.”

Clues on Rates

  • In Poland, the highlight of the week will be the central bank’s policy announcement on Wednesday, where all of the analysts surveyed by Bloomberg expect the monetary authority to hold borrowing costs at 1.5%
    • But unexpectedly strong inflation data on Friday points to more entrenched inflation pressure that could eventually drive price growth beyond the upper end of the central bank’s target range
  • In Russia, traders will be looking for clues on the rate path from Elvira Nabiullina, when the central-bank governor attends the International Financial Congress in St. Petersburg from July 3-5
    • The Bank of Russia shifted solidly to monetary easing at its meeting in June, saying its first interest rate cut in more than a year could be followed by two more in 2019 as inflation slows and growth sputters

Budget and Economic Data

  • India’s new Finance Minister Nirmala Sitharaman will present the budget for the calendar year ending March 2020 at a time when the economy is slowing
    • More fiscal stimulus is probably on the way and while the budget deficit is likely to remain at 3.4% of gross-domestic-product as planned in the pre-election interim budget, sticking to this target will be challenging, Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note
    • Any slippage in the fiscal-deficit target can be unsettling for markets, particularly bonds, Rini Sen, an economist in Bengaluru at Australia & New Zealand Banking Group Ltd, wrote in a note
    • While the Indian rupee advanced in June, it was one of the smallest increases among peers
  • South Korea reported on Monday exports fell for a seventh straight month in June, highlighting the ongoing weakness in tech demand and the economy’s sensitivity to global trade tensions. Overseas shipments dropped 13.5% from a year earlier
    • Malaysia is due to report trade data for May on Thursday
  • A batch of inflation figures was kicked off on Monday by Indonesia and Thailand, to be followed by South Korea on Tuesday, and Turkey on Wednesday
    • Indonesian consumer prices rose at a slower pace in June than the previous month, while core inflation accelerated to its highest level in more than two years
    • Thailand’s CPI eased to a four-month low, below the central bank’s target
  • Consumer prices in Asia remain relatively benign, which gives scope for their central banks to cut interest rates should the global slowdown deepen
  • While Turkey’s June PMI data released Monday showed contraction at 47.9, it’s the best reading in almost a year
    • Inflation data on Wednesday will likely show that consumer prices plummeted in June, bolstering the case for rate cuts to help resuscitate the economy
    • The lira and Turkish stocks advanced after Trump indicated he may reassess his threats to sanction Turkey over its purchase of a Russian missile defense system, fueling speculation that any penalty imposed will be benign
  • Mexico’s consumer confidence figures due on Thursday will be in focus as investors watch for insight into the slowing economy
    • After jumping since President Andres Manuel Lopez Obrador was elected last year, it’s dipped slightly since February
  • Brazil’s monthly industrial production data on Tuesday is expected to show a decline, underlining pressure on President Jair Bolsonaro as he struggles to push through a pension reform bill amid a slowing economy and stubbornly high unemployment

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Emerging-markets are set to shift their focus to the outlook for global growth after a trade truce between the U.S. and China alleviated the immediate risk of a cold war between the two nations.
emerging, markets, investors, bullish, truce
Monday, 01 July 2019 08:32 AM
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