Too many risks for emerging markets to get lift from China data

Emerging markets may need more than a surprise recovery in Chinese manufacturing to exorcise the pain of November.

Though data on Saturday unexpectedly showed China’s official manufacturing PMI surged past the 50 level for the first time since April, the on-off state of the trade talks, currency weakness in Latin America against a backdrop of popular unrest, and a slump in India’s economic growth are likely to curb investor enthusiasm.

MSCI Inc.’s gauges of emerging market stocks and currencies dropped for the third successive week in the five days through Friday, capping their first November declines since 2016. A Bloomberg Barclays index of local-currency bonds fell for a fourth straight week.

A combination of falling relative returns, the slowing pace of interest-rate cuts and a weakening growth outlook are keeping emerging markets in check headed into December. And there’s little sign of a turnaround any time soon, according to HSBC Holdings Plc.

“The conditions are not seen coming together for emerging-market currencies to stage a broad-based recovery,” Hong Kong-based Paul Mackel and Ju Wang said in a note Friday. “It will be another frustrating year for EM foreign exchange.”

China’s retaliation
Markets are waiting for China’s response after President Donald Trump signed a bill backing Hong Kong’s protesters, a move that could complicate the signing of the phase one trade deal. China’s foreign ministry reiterated a threat of retaliation on Thursday.

The Hong Kong bill requires annual reviews of the city’s special trading status under U.S. law and sanctions officials deemed responsible for human rights abuses and undermining the city’s autonomy. A second Hong Kong measure also bans the export of crowd-control items such as tear gas and rubber bullets to the city’s police.

“The market is back on Beijing watch to see if this bill could be a trade deal breaker,” Stephen Innes, chief Asia market strategist at AxiTrader in Bangkok, wrote in a note. “The big question is, does China decide to compartmentalize the Hong Kong issues away from the phase one deal? So that’s where the risk lies now.”

China’s government wants tariffs to be rolled back as part of the phase one trade deal with the U.S., Global Times said in a tweet on Sunday, citing unidentified people in Beijing. The paper reported that a U.S. pledge to scrap scheduled Dec. 15 tariffs cannot replace the rollback in existing ones.

India rate path
India’s deepening slowdown is raising the pressure on the central bank to extend its monetary easing when it meets Thursday. The Reserve Bank of India will lower the benchmark rate by 25 basis points to 4.9%., according to the median of 23 economist forecasts compiled by Bloomberg.

GDP growth tumbled to 4.5% in the July-September quarter from 5% in the previous three-month period, the first time it’s been below 5% since 2013, data showed Friday. Policy makers could make a deeper reduction of 40 basis points if growth surprises to the downside, Bloomberg Economics said before the report was released.

The Reserve Bank of India has been the most aggressive among emerging Asian central banks to cut rates this year, lowering a combined 135 basis points since February. The rupee is the worst performer among emerging Asian currencies in the second half of this year, losing 3.8%.

Elsewhere in Asia, China reported on Monday the Caixin index — which is more weighted toward its private manufacturing companies — also showed improvement in manufacturing for November. While PMIs for South Korea, Malaysia and Indonesia nudged higher, they all stayed in contraction territory below 50, data from IHS Markit showed Monday. Taiwan held steady at 49.8, while Thailand dropped to 49.3. India’s gauge rose to 51.2 from a two-year low of 50.6.

Inflation data on Monday from South Korea barely rose, Thailand’s accelerated slightly but was still below the median estimate and Indonesia’s slowed. Taiwan and the Philippines will release their own CPI data on Thursday.

South Korea’s exports fell more than expected in November, a trade ministry report showed Sunday. Exports dropped 14.3% from a year earlier in November for a sixth straight double-digit decline, the data showed.

Latin tenterhooks
Chile will be in the spotlight Monday as the central bank embarks on the first stage of an intervention strategy announced last week to contain swings in the peso. The bank will sell $200 million each day this week, and place another $200 million in the forwards market. The peso was the worst-performing currency in emerging markets in November, weakening 8.6%.

Meanwhile, the central bank holds a policy meeting Wednesday at which it’s forecast by most economists to cut interest rates by 25 basis points to 1.5%.

Argentina’s President-elect Alberto Fernandez announces his economic team on Friday, an event that may signal what policies and debt negotiations the new administration will pursue. The peso is still the world’s worst performing currency of 2019.

In Brazil, money managers will watch third-quarter GDP figures on Tuesday for any sign that monetary easing has had an effect on growth. November inflation data to be released on Friday will probably flag a comeback, and Wednesday’s industrial production numbers for October are expected to show a pick up in activity.

Aramco pricing
Saudi Aramco’s IPO is due to price Thursday. The Saudi government plans to raise more than $25 billion by selling a 1.5% stake in the world’s biggest oil producer at a valuation of between $1.6 trillion and $1.7 trillion.

Elsewhere, investors turn their attention to a slew of PMIs across the Europe, Middle East and Africa region next week, with manufacturing data for Russia, South Africa, Poland and Hungary due on Monday.

Poland’s monthly central bank meeting is due Tuesday and Wednesday. All economists polled predict the central bank will extend its record run of rates on hold, leaving the benchmark rate at 1.5%. The week will close with the central bank’s official reserves data for November.

© 2019 Bloomberg L.P.