Buy-the-Dippers Chastened as Fresh Emerging-Market Turmoil Lurks

(Bloomberg) -- Emerging-market investors head into a new week smarting from a fresh reminder that moments of optimism can be swiftly snuffed out at the whim of the Chinese central bank or U.S. President Donald Trump.

A day after cheering markets with a stronger-than-expected yuan fixing, China again let it weaken below 7 per dollar on Friday, while the White House delayed licensing decisions for American companies to restart business with Huawei Technologies Co. Trump later added it would be “fine” if the September trade talks with China are canceled. That leaves the daily yuan fixings -- and any other comments or tweets by the president -- in focus as never before.

“We expect uncertainty to remain high in August as the next chapter of the U.S.-China trade war unfolds,” Claudio Irigoyen, a fixed-income and currency strategist at Bank of America Merrill Lynch in New York, wrote in a note.

Stocks and currencies from the developing world retreated over the five days through Friday, the longest streak of weekly losses since May, amid mounting concern the trade war will sap economic growth, prompting policy makers to redouble stimulus measures. A rally on Thursday, which came a day after India and Thailand cut interest rates, quickly evaporated as the yuan fixing allowed the bears to take hold again. The Philippines lowered rates on Thursday and Peru cut on Friday.

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With several markets in the Middle East and Asia closed this week for holidays, Latin America may come under special scrutiny. The continent’s economies are most exposed to the trade war, Irigoyen said, as demand for commodities declines.

Argentine assets face a rough open to the week after President Mauricio Macri lost the key primary vote by a landslide on Sunday, foreshadowing a defeat of his market-friendly policies in the upcoming October election. Mexico will be in the spotlight Thursday with some analysts expecting it will join Latin America’s rate-cutting wave by reducing borrowing costs for the first time in five years.

Yuan Fixing

• The People’s Bank of China weakened the yuan’s daily fixing for an eighth day on Monday, in line with expectations, following the currency’s slide beyond 7 per dollar for the first time since 2008 last week. It has assured foreign companies that the currency won’t weaken significantly
• The yuan lost 1.7% last week, the biggest drop since 2008

Easing Wave

• Mexican TIIE swap rates on Friday were pricing in about 43 basis points of rate cuts in three months and about 80 basis points of easing in six months
• Mexico’s annual inflation rate fell in July to the lowest level since 2016, supporting expectations for monetary easing after the economy stagnated

Argentina’s Primaries

• With 88% of ballots counted, Alberto Fernandez, the opposition candidate who has former President Cristina Kirchner as his running mate, had 47% of votes versus 32% for Macri. If that result stands in October, Fernandez would win the presidency outright
  • The results are poised to trigger a market sell-off on Monday as investors come to terms with the possibility of the type of interventionist measures that were common place under Kirchner
• Traders will also eye the nation’s July inflation data due on Thursday that is expected to have cooled down for the fourth straight month, a welcome sign for Macri as he seeks to restore confidence in the economy

Economic Data Highlights

• Brazil traders will watch for Monday’s release of the central bank’s economic activity index for June for signs as to whether the nation’s economy fell into a recession in the second quarter. Weaker data may reinforce the conviction that more monetary easing is needed. The country’s swap rates are pricing in around 75 basis points of cuts through the end of the year
• Colombia is set to release June retail sales and manufacturing production data on Wednesday and second-quarter gross domestic product data on Thursday
• China’s data will be in focus as traders assess the health of the economy before the imposition of new U.S. tariffs on Sept. 1. Figures on industrial production and retail sales are due on Wednesday
• Malaysia’s second-quarter GDP data is due on Friday. Growth probably picked up to 4.7% from 4.5% in the first quarter, according to Australia and New Zealand Banking Group Ltd. Taiwan is scheduled to report final second-quarter GDP data the same day
• Inflation reports from India and Malaysia are due this week, while the Philippines also releases remittances data
• Russia’s growth probably rebounded slightly in the second quarter, but at a pace that implies lingering weakness in demand. Expectations that the economy will accelerate in the second half of the year may be waning as international demand for commodities weakens amid the global trade war. Russia’s credit rating was lifted by Fitch on Friday to BBB from BBB-
• Investors in Poland will be watching for the GDP and July inflation prints on Wednesday; Polish bond yields fell to an all-time low on Friday and the central bank governor didn’t rule out ending the nation’s unprecedented pause in rates amid the dovish global policy tilt

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