China Stimulus, U.S.-EU Agreement Lure EM Bulls Back: EM Review

(Bloomberg) -- Emerging-market assets advanced, sending equities to their best week in more than two months, as China’s stimulus measures and an agreement between the U.S. and European Union to suspend new tariffs lifted risk appetite.

The MSCI Emerging Markets Index of stocks climbed 2.1 percent, the biggest weekly rally since the five-day period ended May 11, while a gauge tracking developing-market currencies advanced 0.6 percent. The Bloomberg Barclays index of EM local-currency government notes rose 0.4 percent.

Highlights for the week ended July 27:

  • China unveiled a package of targeted stimulus policies -- ranging from a tax cut to special bonds for infrastructure investment -- to boost domestic demand as simmering trade tension threatens to worsen the nation’s economic slowdown
  • U.S. President Donald Trump and European Commission President Jean-Claude Juncker agreed to suspend new tariffs while negotiating over trade, pulling the U.S. and Europe back from the edge of a transatlantic trade war
  • Trump said he will impose “large sanctions” on Turkey over the detention of an American pastor who’s been accused of aiding the failed 2016 coup, while Turkey called the comments unacceptable; earlier in the week, Turkey decided to release Andrew Brunson from jail to put him under house arrest
  • Trump launched a new broadside against Iran, warning of unspecified “consequences” if Hassan Rouhani continues threatening America
  • Bank of Japan officials are looking for ways to keep a stimulus program sustainable while reducing the harm it causes in markets and on the profitability of commercial banks as the July 31 policy announcement approaches
  • Global growth remains robust and many emerging-market countries are better prepared to face crises, but risks to the world economy have increased, finance ministers and central bankers from the Group of 20 nations said
  • The Turkish lira was the worst performer after the central bank held its one-week repo rate unchanged at 17.75 percent, defying expectations for increased borrowing costs
  • Mexico’s peso rallied as U.S. Trade Representative Robert Lighthizer said it’s possible Nafta partners will reach a tentative agreement next month to revamp the 24-year-old pact, while saying trade issues with China will take years to resolve
China Stimulus, U.S.-EU Agreement Lure EM Bulls Back: EM Review

Asia:

  • China’s yuan was the worst performer in Asia while the Shanghai Composite Index advanced; China railed against U.S. trade strategy as “extortion” while U.S. labeled China the world’s most protectionist economy
    • Treasury Secretary Steven Mnuchin told CNBC that he’s monitoring the yuan for signs of currency manipulation and also looking at other currencies
    • The People’s Bank of China made the biggest-ever injection of Medium-term Lending Facility funds
    • The central bank told some institutions that the so-called “structural parameter” in the Macro-Prudential Assessment of their balance sheets will be lowered by about 0.5 points
  • South Korean won was the best performer in Asia; consumer confidence fell to the lowest level since April 2017 amid trade tensions and signs of an economic slowdown
    • The economy of South Korea, which is very reliant on China, may see more adverse impact than previously expected from China’s plan to deleverage, the Bank of Korea said
    • Gross domestic product expanded 0.7 percent in the three months ended June from the previous quarter, when it grew 1 percent
  • An intercontinental ballistic missile assembly facility near Pyongyang is no longer visible on private satellite images and the facility may have been dismantled after June 30, Voice of America reports
  • Pakistan’s Karachi Stock Exchange Index advanced the most since March as former cricket star Imran Khan declared victory in the nation’s election
  • India’s rupee strengthened partly as HDFC Asset’s IPO lured funds from abroad; the central bank eased rules in ‘‘when issued’’ market for government debt
  • The Indonesian rupiah rose for the first week in seven; Bank Indonesia said it will maintain stability, especially the exchange rate, by being present in foreign-exchange and bond markets
    • The central bank forecasts second-quarter growth of about 5.1 percent and said the current-account deficit could be more than $25 billion this year
    • Suharto-era generals Prabowo Subianto and former president Susilo Bambang Yudhoyono are edging closer to an alliance to challenge President Widodo in elections next year
  • Thailand’s SET Index of stocks climbed for a fourth week as the Finance Ministry raised 2018 GDP forecast to 4.5 percent, from a 4.2 percent prediction in April; it weakened its forecast for average baht rate during the year to 32.25 per dollar from 31.5
    • Thai baht extended slide for a 7th straight week
  • The Malaysian ringgit was little changed; the country has 75 billion ringgit ($18 billion) of investment in the pipeline as of May, of which almost two-thirds is FDI, said Trade Minister Darell Leiking
  • The Philippine Stock Exchange Index rallied the most since January 2017; President Rodrigo Duterte asked lawmakers to cut corporate income taxes before the end of the year
    • Duterte said government’s proposed borrowing in 2019 of 1.19 trillion pesos ($22 billion) is 19.3 percent higher than this year’s debt program

EMEA:

  • Turkey’s lira retreated while the Borsa Istanbul 100 Index rose for a second week; the fight against inflation will be carried out in sync with efforts aimed at boosting economic growth, according to Treasury and Finance Minister Berat Albayrak
    • Albayrak pledged to end “cacophony” on economic policy at a meeting with economists and academics, according to two people who attended the meeting
  • The ruble advanced more than 1 percent while bond yields climbed; Russia’s central bank left the policy rate on hold at 7.25%, as expected
    • Two leading U.S. senators said they’ll introduce a bipartisan bill to increase U.S. sanctions against Russia; would target Russian debt as well as the energy and financial industries
    • Republican Senator Bob Corker said he’s confident hearings planned on possible Russian sanctions will lead to legislation before November’s midterm elections
    • Trump will delay a second summit with Russian leader Vladimir Putin until next year, the White House said
    • Trump said he’s “very concerned” that Russia will interfere in the upcoming congressional elections -- to help the Democrats
    • Russia, one of the world’s top three crude producers, is preparing the most radical shakeup of its oil-tax system since 1999
  • Non-residents owned 40.2 percent of South Africa’s government bonds by the end of June, down from a high of 42.8 percent in March; the rand posted its third weekly gain in July
    • China pledged to invest $14.7 billion in South Africa and grant loans to its state power utility and logistics company
    • Trade and Industry Minister Rob Davies said nation must strengthen its continental trade ties as it gets hit by U.S. trade war
    • South African Reserve Bank Deputy Governor Daniel Mminele emphasized the need for monetary authorities around the world to have independence from political pressure
  • Hungary’s forint advanced against the dollar, halting a two-week losing streak; the central bank left all interest rates unchanged and reiterated a pledge to maintain loose policy for the time being
    • READ: Forint Bears Warned Not to Be Complacent as Short Positions Grow

Latin America:

  • Chile’s peso was the best EM performer as copper showed signs of reaching a bottom while short peso positions have been trimmed
    • The nation’s issuer rating was downgraded to A1 from Aa3 by Moody’s Investors Service; since new rating is consistent with that of S&P’s and still one notch above Fitch’s, market reaction was generally calm
  • The Mexican peso and Mexbol stock index both advanced; Trump congratulated President-elect Andres Manuel Lopez Obrador in a letter, while warning that a successful Nafta deal must be done quickly
    • Mexican and Canadian officials are optimistic they can reach a Nafta trade deal with the U.S. in the next several months
    • READ: Mexico Wants August Nafta Deal as Trump Vows ‘Dramatic’ Action
    • Mexico’s inflation rate increased more than expected in the first half of July as gasoline and some food prices increased
  • Brazil’s real extended a four-week winning streak; the nation’s so-called centrist parties endorsed the presidential bid of Geraldo Alckmin from the Brazilian Social Democracy Party
    • Jair Bolsonaro, who leads polls that exclude the jailed former President Luiz Inacio Lula da Silva, secured his party’s backing as presidential candidate; Lula’s candidacy may be barred by Electoral Court as soon as next month, Valor reported
    • The central bank sees the current-account deficit at $2.5 billion in July; the authority is considering cutting reserve requirements by the end of this year, newspaper O Globo reports
  • Argentina’s Merval Index was the world’s best performer in dollar terms; the economy will probably expand at a slower pace than previously forecast in 2018, the government said; gross domestic product will probably rise 0.5 percent to 0.6 percent

Upcoming data:

Tuesday, July 31ChinaJuly manufacturing, non-manufacturing PMI
Mexico, Taiwan2Q GDP
Turkey, South AfricaJune trade balance
ThailandJune manufacturing production index, current-account balance
South KoreaJune industrial production
Wednesday, Aug. 1India, Brazil Monetary policy decision
ChinaJuly Caixin manufacturing PMI
Indonesia, South Korea, ThailandJuly consumer price index
South KoreaJuly trade data
Thursday, Aug. 2Mexico, Czech RepublicMonetary policy decision
Brazil, ArgentinaJune industrial production
Friday, Aug. 3TurkeyJuly consumer price index
ChinaJuly Caixin services PMI
MalaysiaJune trade data
South KoreaJune current-account balance

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