Trade War to Last Longer Than Boost From Fed Cuts, Analysts Say

(Bloomberg) -- Emerging-market investors said Friday’s escalation in trade tensions between the U.S. and China is likely to prevent any rebound in asset prices.

While another rate cut by the Federal Reserve could provide some relief in the short term, trade tensions are expected to linger for much longer. China’s decision to impose $75 billion in retaliatory tariffs on U.S. goods shows that no quick resolution is in sight. Donald Trump said he would respond later today.

“In the medium term, EM might remain under pressure mainly due to trade risks related to the U.S. elections and a higher probability of a recession,” said Claudia Ceja, a strategist at BBVA in Mexico City.

Developing-nation assets took a hit Friday after China announced the new tariffs, but the impact was latter offset by Jerome Powell’s much anticipated speech in the Jackson Hole summit that kept bets on a rate cut alive. The Fed chairman said the U.S. economy is in a favorable place, but faces “significant risks” as growth abroad slows amid trade uncertainty. Then Trump said he would retaliate against China and markets went back down.

Trade War to Last Longer Than Boost From Fed Cuts, Analysts Say

Here is what analysts, strategists and money managers are saying about today’s drivers for emerging markets:

Ceja, from BBVA:

  • Chinese “retaliation was expected, though, markets had been a bit calm about that since Trump decided to postpone initial tariffs until December”
  • “Overall, trade risks have been mounting and so a higher risk premium is to be expected. MXN will most likely remain under pressure as at some point, ahead of the U.S. elections, further tariffs might be a threat as well”
  • “The Fed might offset such risks for the FX world, however, it depends on the degree to which they are willing to act”
  • “The theme is the effectiveness of monetary policy, and since it seems that the effectiveness is lower due to both the starting point of interest rates and the business cycle, the surprise might be if they are considering some other kind of tools”

Brendan McKenna, a strategist at Wells Fargo in New York

  • “It’s obviously an escalation in the trade tensions and it’s putting some pressure on emerging currencies”
  • “The tariffs look pretty aggressive too, oil exports and a 25% tariff on autos”
  • “I guess there hasn’t been as much progress as both sides claim there has been the last few days”
  • “We had a retaliation built into our most recent forecasts”
  • McKenna is not planning to change any of his forecasts yet, “although we have to see what Trump and other U.S. policymakers respond with”

Sacha Tihanyi, deputy head of emerging market strategy at TD Securities in New York

  • Investors are digesting Powell’s “emphasis on trade as the key uncertainty, and in light of the China news this morning, the market is taking it as validation of the easing that’s priced-in”
  • Powell’s commentary on trade “just shows that this long-burning issue remains, and will continue to be at play for the general future, so we should all expect that”
  • China has been emboldened “to up the trade pressure as they see his pressure points” after Trump’s latest round of tariffs and backtracking ahead of holiday shopping season

Michael Reynal, a portfolio manager with RS Investment Management in Des Moines, Iowa

  • “The news is clearly negative for a resolution of the tariff dispute and will impact oil, soft commodities and other markets”
  • “I hope this is a negotiation tactic. China has a stronger position than many people realize as trade is simply not a large factor in GDP growth”
  • “China’s long term goal is to open its capital market, and I worry that a hardening of relations with the U.S. -- or the West -- may slow that process”

Jan Dehn, the London based head of research at Ashmore Group, which oversees $85 billion in emerging-market assets

  • “Market sees this as an escalation and doesn’t like it. It is frightening so people feel they have to sell some EM FX. I think it is bad news, but hardly a big surprise. We know that Trump does not like free trade and does not like China”
  • Says “the big ‘new kid’ on the block is a U.S. recession, or the prospect of one. It is not priced yet, not even close. U.S. recession will provide plenty of short term instability”
  • “The external environment can continue to deliver negative surprises and EM can in the short term be on the back foot, but it is only temporary volatility”

©2019 Bloomberg L.P.

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