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Emerging-market investors await Fed as North Korea meeting looms

Jun 11 2018 07:56
Ben Bartenstein, Lilian Karunungan and Alex Nicholson, Bloomberg

Emerging-market money managers are tiptoeing into Monday chastened by a week that saw two surprise interest-rate hikes, a market meltdown in Brazil, Argentina’s $50bn loan rescue, rising fears of a trade war and the realisation that the end is nigh for stimulus in Europe.

That’s not to mention an all-but-certain rate increase by the Federal Reserve on Wednesday and potential drama tied to Donald Trump’s much-anticipated meeting with North Korean leader Kim Jong Un in Singapore on Tuesday.

“Some kind of tension-reducing deal is, of course, basically good news, but markets have already priced this in,” said Leon Cornelissen, chief economist at Robeco in Rotterdam. “If the summit would fail and the US would return to beating the war drums, this basically should not unsettle markets too much."

Trump said he may sign an accord with Kim to formally end the Korean War after almost 70 years. Progress toward easing tensions in the peninsula is likely to boost the economic outlook for South Korea and the region.

It would be one less risk for emerging-market investors to worry about after a rising dollar exposed short-comings in monetary policy in some emerging markets this quarter. Currencies and bonds declined for a second week in the five days through Friday, but the dollar wasn’t to blame. The Bloomberg Dollar Spot Index dropped last week for the first time mid-April.

Elsewhere, Mexican peso traders will monitor the third presidential debate, taking place Tuesday, after leftist presidential front-runner Andres Manuel Lopez Obrador widened his polling lead. In the opposite hemisphere, FIFA expects more than 3 billion people to tune in as the World Cup kicks off in Russia.

Renewed trade tensions are also on the horizon as US tariffs on $50 billion worth of Chinese imports will be completed by June 15. This could end up in “some form of tit-for-tat,” which will have significant negative implications for global growth, according to Craig Chan, the global head of emerging-market strategy at Nomura Holdings Inc. in Singapore.

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