US-China trade risk keeps emerging-market investors on edge

Emerging markets are once again at the mercy of the US-China trade war after investors spent an exhausting August pivoting between disappointment and optimism for a truce.

Read: Emerging markets are often bad in August, but rarely this bad

After one of the most painful months for emerging markets in years, traders will be watching for what comes next — and also for signals that the Federal Reserve can foster global growth. Last month proved disappointing for money managers betting on rising stocks and stronger currencies amid trade tension and a resurgent dollar. September may not be much better, with Argentina imposing capital controls amid a currency crisis.

Worst of the worst

“For EM prospects to improve, we would need to see the Fed turning more proactively dovish and/or trade tensions abating,” Morgan Stanley strategists including James Lord in London wrote in a note. “Neither of these outcomes seem likely for now.”

Morgan Stanley said it expects developing-nation currencies to depreciate about 2% against the greenback in the coming month.

The erratic US-China trade narrative was still in the spotlight as US tariffs on about $110 billion of Chinese goods went into effect Sunday, as did Beijing’s countermeasures. Data at the weekend showed a further deterioration in manufacturing output from the world’s No 2 economy.

Capital controls

Argentina’s central bank set a limit of five days for exporters to repatriate foreign currency, while institutions will need need authorisation of the bank to buy dollars in the foreign exchange market, except in the case of foreign trade. Individual Argentines will be limited to dollar purchases of no more than $10 000 a month

“This’ll add to the volatility and will add to the confusion over what’s going on in Argentina,” said Andrew Brenner, head of international fixed income at Natalliance Securities in New York. People have become more risk averse as the volatility increased all through the month of August when it comes to emerging markets, he said

Eye for an eye

On Monday, China’s Caixin Manufacturing PMI showed a surprise expansion to 50.4 in August compared with a consensus estimate of 49.8 and a reading of 49.9 in the previous month. A score above 50 signals expansion, while less than 50 a contraction.

The Caixin PMI’s surprise jump back into expansion shouldn’t be seen as a genuine improvement in China’s export sector as the latest wave of US trade-war tariffs will put more pressure on exporters, according to Chang Shu, chief Asia economist for Bloomberg Economics.

August PMI reported on Monday by China’s trading partners such as Taiwan, South Korea, and Indonesia indicate contractions, as trade uncertainty works its way up and down the value chain
Malaysia’s trade numbers are due on Wednesday, which will be one of the last key data points before Bank Negara Malaysia’s monetary policy meeting on September 12. Meanwhile, South Korea will release final figures for its second-quarter GDP on Tuesday.

Markit will publish Poland’s August PMI on Monday, followed by official FX reserves for August on Friday.

More cuts

Russia is expected to deliver its third quarter-point cut in a row on Friday as inflation slows and the economy sputters. While all but one of the 16 economists polled by Bloomberg predict a reduction to 7%, traders will be on the lookout for any hawkish signals after the ruble’s monthly slide.

In Chile, the central bank will probably carry out its second interest rate reduction in the past three months as growth stalls and inflation slows dramatically.

Economic data

Inflation data are due from a slew of Asian countries, starting with Thailand and Indonesia on Monday, South Korea on Tuesday, Philippines on Thursday and Taiwan on Friday.

Brazil is expected to show a sustained decline of consumer price inflation in Friday’s reading of August data, which could increase the odds of another rate cut in mid-September

Data in Colombia will probably show consumer prices picked up for a sixth month, leaving the central bank scant leeway to cut borrowing costs at its September meeting

Turkey’s economy probably expanded 0.5% in the three months through June, from 1.3% the quarter before, data may show on Monday

Traders will be bracing from a raft of data from South Africa. The country probably avoided its second recession since the beginning of 2018, data may show on Tuesday. Gross domestic product probably expanded 2.5% in the second quarter, after contracting the quarter before, according to the median estimate in a Bloomberg survey. The current-account deficit probably widened to 3.1% of GDP in the same quarter, from 2.9%, data may show on Thursday. The manufacturing PMI and vehicle sales on Monday, and foreign-exchange reserves on Friday will add to the picture.

Nigeria’s economic growth probably quickened in the second quarter to 2.5%, from 2% the quarter before, data may show on Tuesday.

© 2019 Bloomberg L.P.

Source: moneyweb.co.za