Trade Tension, Italian Political Woes Prompt Selloff: EM Review

(Bloomberg) -- Emerging-market stocks dropped for a third week and currencies retreated as prospects for a global trade war returned. The Turkish lira rallied amid speculation of further central bank support, though talk of a potential ratings downgrade had traders on edge by Friday.

The MSCI Emerging Markets Index fell 0.5 percent, while a gauge tracking developing-market currencies declined 0.2 percent. The Bloomberg Barclays index of local currency government bonds rose 0.1 percent.

Highlights for the week ended June 1:

  • The on-again, off-again U.S.-North Korean summit was back on again Friday, according to President Donald Trump. His announcement came after he met a senior adviser to Kim Jong Un in the White House. The meeting will take place as originally scheduled on June 12, Trump said.
  • U.S. Commerce Secretary Wilbur Ross said that starting Friday, the U.S. would levy new metals duties on imports from the European Union, Mexico and Canada on national security grounds, ending temporary exemptions
    • The EU said it would take immediate steps to retaliate, while Mexico vowed to impose duties on everything from U.S. flat steel to cheese. Canada said its tariffs will be on as much as C$16.6 billion ($12.8 billion) of U.S. steel, aluminum and other products starting July 1
  • U.S. May non-farm payrolls rose by 223,000 jobs, compared with a 190,000 estimate as the unemployment rate matched a 48-year low; the jobs data bolstered optimism about the economy, all but solidifying chances of a Fed rate hike later this month
  • Italy’s political crisis spurred global market turmoil, testing the strength of the euro area and leading to a rout in the region’s bonds; the nation’s populist Five Star Movement and League parties prepared to sweep to power in a spectacular reversal of political fortune that ends three months of deadlock and opens the way to a period of friction with the rest of Europe
  • Indonesia’s rupiah was Asia’s best performing currency after the central bank raised its policy rate by 25 basis points to 4.75 percent, the second increase in two weeks. Governor Perry Warjiyo flagged that further rate increases may be possible
  • Turkey’s central bank said it would simplify monetary policy; starting in June, the central bank’s benchmark would be the one-week repurchase rate, which it hadn’t used as a main funding tool since January 2017, and the rate has been set at 16.5 percent
    • Turkey is prepared to raise interest rates again if inflation accelerates, according to two money managers who met Turkey’s central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek in London

Asia:

  • The Chinese yuan extended a three-week slide; China’s manufacturing purchasing managers index rose to an eight-month high and exceeded all forecasts in Bloomberg’s survey of economists; the non-manufacturing PMI rose for a third month
    • The nation is studying a plan to import more coal from the U.S. as part of efforts to narrow the trade gap, according to people with knowledge of matter
  • India’s rupee rose for a second week; the nation’s growth accelerated to 7.7 percent in the fourth quarter of the financial year ended March 31, the fastest among any major economy
  • The South Korean won strengthened for the first time in three weeks; President Moon Jae-in could make a trip to Singapore for a three-way summit with his U.S. and North Korean counterparts, Yonhap reports
    • Exports rebounded in May following a surprise contraction in April as shipments of semiconductors hit a record high, while inflation slows, moving away from Bank of Korea’s target
  • Malaysia’s ringgit halted an eight-week losing streak; a new sales tax will be implemented in September to replace the consumption levy to be scrapped in June as Prime Minister Mahathir Mohamad seeks ways to temper concerns on the nation’s budget
    • Prime Minister in-waiting Anwar Ibrahim says he would like to stay out of the cabinet for now to give Mahathir “a free hand” to run the country
  • Thailand’s baht weakened; the current-account surplus narrowed to an 11-month low of $1.36 billion in April, while consumer prices climbed by a more-than-expected 1.49 percent on the year in May
    • There’re no concern about capital outflows and the country has high foreign reserves, low foreign debt and a current-account surplus, which helps cushion the nation from volatility in global financial markets, Bank of Thailand Governor Veerathai Santiprabhob said
  • The Philippine peso was little changed; inflation is likely to accelerate to 4.6-5.4 percent in May, according to Bangko Sentral ng Pilipinas
    • The central bank may raise policy rate “some more, depending on the data,” Governor Nestor Espenilla said
  • Pakistan’s rupee was stable; President Mamnoon Hussain approved the date for general elections on July 25

EMEA:

  • The Turkish lira ended a four-week slump; fiscal policy will tighten in line with monetary policy tightening, Finance Minister Naci Agbal said
  • South Africa’s rand fell; the country recorded a second straight surplus on its trade balance in April as imports of textiles and base metals dipped
    • The ruling African National Congress wants to test whether land reform is permitted under the prevailing constitution, if not, it will be amended, Ace Magashule, the party’s secretary-general, said
    • S&P affirmed its BB+ rating on South African debt at the end of last week
  • The Russian ruble rose for a second week; inflation expectations for the next 12 months jumped to 8.6 percent in May from 7.8 percent in April, according to a poll conducted by inFOM for Bank of Russia
    • Russia and Saudi Arabia said they discussed raising oil output to ease consumer anxiety, leading to the longest run of losses in almost four months
  • Poland’s zloty strengthened the first time in seven weeks; Polish inflation accelerated to a four-month high in May at an annual 1.7 percent

Latin America:

  • The Mexican peso was the region’s second-worst performer as U.S. metal tariffs made it difficult to reach a North American Free Trade Agreement deal before the July 1 presidential election, according to Juan Pablo Castanon, the head of Mexico’s business coordinating council CCE
    • Mexican Foreign Minister Luis Videgaray said the nation will keep negotiating for a successful Nafta
    • A central bank member said more rate hikes may be needed in the near future, while another member said Nafta talks are hurting peso more than election, according to minutes from May 17 meeting
    • A new poll shows left-wing presidential candidate Andres Manuel Lopez Obrador widening his lead over peers
  • Brazil’s real sank the most among emerging-market currencies even as the government said the truckers’ strike is easing and reaffirmed a pledge to reduce diesel price
    • Brazil is recovering from strike yet investors and consumers remain on edge; markets slumped on Friday after Petrobras CEO Pedro Parente resigned
    • Loss of revenue stemming from a proposed fuel subsidy program, even if somewhat contained for the rest of 2018, is negative for the sovereign’s credit profile, Moody’s VP and senior analyst Samar Maziad said
    • Gross domestic product expanded 0.4 percent in the first quarter from the previous three-month period
  • The Colombian peso climbed for a second week as the latest opinion poll showed market-friendly candidate Ivan Duque is favored to win the Colombian presidency
  • Chile’s peso fell even as April manfacturing production, retail sales and unemployment data all came in better than estimated, further confirming the nation is on a solid path of recovery

Upcoming data:

Monday, June 4Turkey, IndonesiaMay consumer price index
KazakhstanMonetary policy decision
Tuesday, June 5Philippines, Taiwan, Colombia May consumer price index
South Africa1Q GDP
BrazilApril industrial production
MalaysiaApril trade data
South KoreaApril current-account balance, May foreign reserves
TaiwanMay foreign reserves
Wednesday, June 6India, PolandMonetary policy decision
Thursday, June 7Turkey, Peru Monetary policy decision
China, PhilippinesMay foreign reserves
South AfricaApril manufacturing production
MexicoMay consumer price index
Romania1Q GDP
Friday, June 8China, TaiwanMay trade data
BrazilMay IPCA inflation 
IndonesiaMay foreign reserves
PhilippinesApril trade data
Chile, HungaryMay consumer price index

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