Emerging markets caught between rate-cut euphoria and trade woes

Two opposing forces are at play in emerging markets. The first is excitement over the dollar’s decline as speculation grows that the US will cut rates soon. And the second is dread over President Donald Trump’s trade war.

While Mexico averted the start of new tariffs, Washington’s campaign to shake up trade agreements worldwide is still wreaking havoc on global economies. But the impact of Trump’s unpredictable tweets will probably be less detrimental on emerging assets if the dollar’s slide last week, the worst against a basket of currencies since February 2018, proves to be a trend.

“Broadly we remain constructive on emerging-market debt,” said Paul Greer, a London-based money manager at Fidelity International, whose emerging-market debt fund has outperformed 97% of peers this year after reducing risk in the first quarter. “We now see some opportunities re-emerging after a tough last three to four months for EM currencies.”

Developing-nation local-currency bonds capped an eighth day of gains on Friday, the longest winning streak since January 2018.

Rate decisions

Russia’s central bank Governor Elvira Nabiullina said policy makers may reduce interest rates for the first time in a year at their meeting on FridayTraders have boosted wagers for rate cuts to the highest in more than a year. The Turkish central bank is due to set rates on Wednesday.

Almost all of the economists surveyed by Bloomberg expect the monetary authority to hold rates, even after inflation slipped below 19% last monthDespite the lira’s recent gains, it’s probably still premature to ease monetary policy, with the bank only reversing an emergency rate hike as recently as in May, according to Bloomberg Economics.

Peru’s central bank will probably keep its benchmark lending rate at a nine-year low for a 15th straight meeting on Thursday as trade tensions depress copper prices and damp the outlook for exports.

Economic pulse

China’s export growth unexpectedly rebounded in May, while imports fell more than forecast amid the escalating trade war with the US data showed on Monday. Other releases this week, which include fixed-asset investment, retail sales and industrial production, will help shed light on how the economy is holding up ING Groep NV in a June 6 note said “the economy seems to be experiencing only tremors right now and growth appears to be holding up, as in the first quarter of the year”.

India will report May inflation data on Wednesday, with economists forecasting that price gains may have accelerated The central bank last week cut its benchmark interest rate for a third time this year and paved the way for more policy easing Inflation likely remained slack in May — reinforcing pressure on the central bank to cut interest rates further, according to Bloomberg Economics.

 South African data on April manufacturing on Tuesday, followed by retail sales and mining production on Wednesday, will give investors clues on whether bets on a rate cut next month are warranted. Forward-rate agreements price in an 80% chance of a 25 basis-point reduction in the repo rate.

In Mexico, April’s industrial production figures will be closely watched on Tuesday for signs of further strain on the economy after gross domestic product contracted in the first quarter from the previous three months.

Trump boasted of “large” agricultural sales to Mexico as part of the deal reached Friday on border security and illegal immigration that averted the threat of US tariffs. Three Mexican officials say they’re not aware of any side accord Argentina may report on Thursday that inflation slowed further in May after the government froze prices on dozens of goods in an attempt to boost President Mauricio Macri’s re-election bid.

The peso stabilised last month, although it still tops global losses for the year. The rapporteur of President Jair Bolsonaro’s pension reform proposal is set to send his report to the lower house, where floor votes on the bill could come as soon as the end of this month.

Brazil’s real has led regional gains in the past month.

© 2019 Bloomberg L.P