Agility is the watchword as trade tensions jolt emerging markets

The trade war is taking a turn for the worse just as investors digest one of the roughest weeks for emerging markets this year.

China pledged to retaliate after President Donald Trump threatened to put 10% tariffs on a further $300 billion of the country’s goods. The escalation puts the Asian nation’s trade data on Thursday in the spotlight amid concern the year-long dispute is hurting its economy.

Read: Trump hits China with more tariffs, sharply escalating trade dispute

“The risk to emerging-market assets in the near term is skewed to the downside,” said Patrick Wacker, a fund manager at UOB Asset Management in Singapore who locked in some profit ahead of the Federal Reserve’s decision. “With assets having to price in more risk for global growth and trade policy, we do not believe right now is the best time to add bonds most sensitive to market swings.”

Emerging-market currencies had their biggest weekly decline in more than a year and bond spreads widened after the Fed, while cutting rates for the first time in more than a decade, stopped short of signalling it was the start of an aggressive easing cycle. Morgan Stanley turned bearish on emerging-market credit soon after removing a bullish call on currencies.

Investors will also be paying attention to Turkey, which publishes inflation data Monday, and Russia, after the US announced fresh sanctions. The central banks of the Philippines and India are forecast to lower rates this week, and South Korea is preparing to announce details of a plan to remove Japan from its easy-trade list as the countries’ political standoff intensifies.

“This once again shows that it’s foolish to make long-term predictions on markets and anchor positions to predictions,” said Nader Naeimi, AMP Capital’s head of dynamic markets in Sydney. “I can’t remember any other time that agility and flexibility was so paramount.”

Trump thumps China

• The Trump administration is expected to publish in “days” the final list of Chinese goods subject to the new 10% tariff effective September 1
• A gauge of expected swings in the offshore yuan over the next month spiked the most since China’s devaluation in August 2015. The onshore yuan slid 0.6% Friday to 6.942, the weakest level since November
• “A break of 7 yuan to the dollar looks inevitable,” said Mansoor Mohi-uddin, a Singapore-based senior macro strategist at NatWest Markets who met clients and officials in Beijing last week. “Onshore dollar demand was already high even before the Federal Reserve’s hawkish cut and President Trump’s new tariff threat”
• China’s exports and imports likely fell in July from a year earlier, dented by higher US tariffs

More rate cuts

• Almost of all the economists surveyed by Bloomberg forecast the Reserve Bank of India will cut the repurchase rate by 25 basis points to 5.5% Wednesday, after having eased three times so far this year. The rupee was the best-performing currency in emerging Asia in the past six months
• Consensus is that the Philippine central bank will reduce its key rate by 25 basis points, its second cut this year. The peso weakened 0.7% last week after touching the strongest level since January 2018 at the end of July
• Peru’s central bank may consider cutting its benchmark rate on Friday after officials signalled additional stimulus is an option amid weaker-than-expected economic growth and tame inflation
• Thailand is set to keep rates on hold Wednesday

Brazil’s pension overhaul

• Congress returns from a two-week recess to hold a second-round vote on President Jair Bolsonaro’s flagship pension overhaul
• Brazil’s central bank minutes are due for release on Tuesday after the country kicked off a monetary-easing cycle on July 31. The real has outperformed all Latin American peers except Mexico’s peso so far this quarter
• The nation will release inflation data and June retail sales, which will signal whether the country tipped into a recession

Economic highlights

• In Turkey, Monday’s inflation reading will help determine how quickly and deeply the central bank will continue to reduce interest rates after a 425 basis-point cut on July 25
• Economists predict that inflation accelerated to 16.9% in July from 15.72% due to the expiry of temporary tax cuts
• Second-quarter GDP data is expected from Indonesia on Monday, with the Bank Indonesia governor previously linking future monetary-policy easing to the domestic growth outlook
• The Philippines will report economic-growth data on Thursday, before the central bank rate decision
• Investors will be eyeing trade numbers from the Philippines and Taiwan due Wednesday
• Colombia will publish CPI data on Monday, Taiwan and the Philippines on Tuesday
• Argentina is set to release construction and industrial statistics on Tuesday that may provide evidence of the economy’s recovery. The figures will be published before a key primary vote for the presidential election on Tuesday
• June economic activity data in Chile, due on Monday, may support the case for a rate cut in September by the central bank.

© 2019 Bloomberg L.P.