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Trade war escalation sends shock waves amid sell-offs

May 11 2019 19:04
Bloomberg News

Emerging-market equities saw their worst rout since October 2018, while currencies extended a four-week losing streak as trade clashes intensified between the world’s two largest economies. The US ratcheted up tariffs on $200bn (about R2.8bn) of goods from China, which vowed to retaliate.

The following is a roundup of emerging-markets news and highlights for the week ending May 10.

Asset Moves as of 16:20 in New York on Friday: Weekly MSCI EM stocks index -4.6%. MSCI EM FX index -0.5%. Bloomberg Barclays Global EM Local Currency bond index (up to Thursday) -0.6%.

Highlights:

Trump administration increased tariffs on more than $200bn of Chinese goods to 25% from 10%; China said it would retaliate, though it hasn’t specified how as yet. US and China concluded high-level trade talks on Friday, lacking a deal yet avoiding a breakdown in negotiations; President Trump says the talks are constructive while removal of tariffs will depend on future negotiations.

American officials gave China a month to reach a deal or face tariffs on all its exports to the US, according to two people familiar with the matter. China’s President Xi sent Trump a letter about working closely together to ease trade tensions and the two might speak over the phone.

The Trump administration will expand the number of countries it scrutinises for currency manipulation in an upcoming report, people familiar with the matter said, after lowering the bar for foreign governments to come under scrutiny.

Malaysia’s central bank cut its benchmark interest rate for the first time since July 2016, trimming it by a quarter percentage point to 3%; its Philippine counterpart also lowered its key rate by 25 basis points to 4.5%, the first reduction since an operational adjustment to the rate in 2016 North Korea is once again pressing the boundaries of what it can get away with, returning to missile tests in violation of international sanctions championed by Trump.

South Africa’s ruling African National Congress leads with 57.3% of the votes after 90% of ballots were counted, according to the Independent Electoral Commission.

Central banks of Brazil, Chile and Peru left their respective policy rates unchanged amid a challenging growth outlook. Venezuela detained National Assembly Vice President Edgar Zambrano in Caracas, marking the first major arrest since opposition leader Juan Guaido called on the armed forces to revolt against the government on April 30.

Asia

China’s exports unexpectedly fell and imports rose in April, before the abrupt escalation of the trade dispute with the US. The nation’s inflation rate rose to the highest in six months in April, while producer prices climbed faster than analysts expected. Credit growth slowed more than forecast in April after jumping in the first quarter.

The country’s stashing away more gold in its coffers as the central bank boosted bullion reserves for a fifth straight month, recording the biggest inflow since 2016. This year is shaping up to be the biggest by far for defaults in China’s $13 tr bond market. The time is approaching for South Korea to start getting concerned about inflation being "excessively low," said Bank of Korea policy board member Cho Dongchul.

Sole proprietorship loans by non-bank financial companies have increased rapidly and will require careful management, said Kim Yongbeom, vice chairman of the Financial Services Commission. Malaysia’s Finance Minister Lim Guan Eng met with Fitch, Moody’s and S&P, who were convinced that the country will achieve its fiscal targets, he said.

Foreign ownership of Malaysian government and corporate bonds and bills fell 5.2% to 180.1bn ringgit ($43bn) in April, the lowest since March 2017. A senior leader of Indian Prime Minister Narendra Modi’s ruling party forecasts it will require the support of allies to form the next government, the first time the prospect of a coalition has been raised.

Indonesia’s economic growth slowed in the first quarter amid a global slowdown that hurt the nation’s exports. Foreign reserves were little changed at $124.3bn in April; first-quarter current-account deficit widened to 2.6% of GDP from revised 2.01% in same period a year ago.

The Bank of Thailand kept its key rate unchanged at 1.75% as expected and said the economy is expected to grow at a slower pace than earlier estimated.

The Election Commission allocated so-called party-list seats, a day after certifying 349 members of parliament who won in their constituencies. The results point to a pro-military governing coalition.

The Philippine economy grew at the slowest pace in four years in the first quarter. Exports dropped more than expected in March and the trade deficit came in larger-than-predicted; inflation slowed for a sixth consecutive month in April. Nation plans to sell yuan-denominated debt in the week of May 13 after raising €750m ($842m) in its return to the euro bond market following more than a decade of absence, Treasurer Rosalia de Leon says.

EMEA

Turkey’s High Election Board ordered a re-run of mayoral elections in Istanbul, overturning a defeat for President Recep Tayyip Erdogan and sending the lira plummeting as concerns grew over what critics say is the latest assault on the rule of law. The central bank stepped in to tighten the supply of liras on Thursday by raising borrowing costs for lenders and making a series of changes to reserve requirements to bolster the battered currency.

Turkey denies news reports suggesting it will abandon plans to buy advanced Russian missile systems; US had threatened to sanction Turkey if it proceeded with the purchase Surging fuel, alcohol and tobacco prices pushed Hungarian inflation near the central bank’s acceptance limits, contradicting official forecasts for a slowdown and increasing pressure for further monetary tightening.

Bahrain said it will receive about $2.3bn this year from a five-year support package provided by its Gulf Arab allies as the island-kingdom seeks to reduce its budget deficit and debt.

The nation is said to plan a return to the international bond market this year Zimbabwean President Emmerson Mnangagwa assured foreign investors that they will access their dividends and are free to choose who they want for local partners. The central bank governor said he expects the official and black-market exchange rates to converge within two months, as the currency extended its decline against the dollar to almost 25% since February.

Russia kept up its run of elephantine debt sales, netting more than $1bn (about R14bn) in a single ruble-bond auction on Wednesday

Latin America

Brazil held its benchmark interest rate at a record low and signaled that a period of weaker-than-expected growth is still insufficient for reduced borrowing costs. Retail sales rose less than almost all analysts expected in March, as falling confidence hinders credit growth even with historically low interest rates.

Economists slashed their 2019 growth forecast by more than a percentage point in the past three months, as investment and consumer demand stalled due to uncertainty about the approval of pension reforms.

Mexico President Andres Manuel Lopez Obrador scrapped a round of bids to build an $8bn (about R113bn) refinery, instead handing responsibility for the project to troubled Petroleos Mexicanos.

State-oil company Pemex will now take the lead in building the refinery based in the president’s native Tabasco state and has about $2.6bn (about 36bn) to begin works, Pemex bonds sold off after the news.

More cargo to the US from Mexico is being held up at the border, accompanied by increasing evidence that such delays are dimming prospects for American companies.

In the boldest sign yet that Venezuela is abolishing its complex web of financial controls, the government lifted controls on banks trading foreign currency; the move comes 16 years after former President Hugo Chavez imposed controls, but may prove to be too little too late as the country grapples with hyperinflation and a historic economic depression.

Chile and Peru left their key interest rates unchanged at 3% and 2.75% respectively as economic growth remains muted. Argentina’s former President Cristina Fernandez de Kirchner, who is leading opinion polls ahead of October’s general election, spoke in public for the first time this year without commenting on whether she would run as a presidential candidate.

xi jinping  |  donald trump  |  africa  |  china  |  us  |  indonesia  |  turkey  |  malaysia  |  currencies  |  trade war  |  markets
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