EM Review: August Tumult Ends With Trade War Dictating Mood

(Bloomberg) -- Retaliatory trade tariffs rattled markets in August, making it the worst month for developing-nation currencies since May 2012. Adding to the bleak outlook for riskier assets, Argentina embarked on a full blown sovereign debt crisis, China allowed the yuan to significantly weaken and the U.S. yield curve inverted for the first time since 2007. Currencies fell every week of August and stocks fell the most since the May sell-off.

The following is a roundup of emerging-market news and highlights for the week ending Sept. 1.

Read here our emerging-market weekly preview, and listen to our weekly podcast here.

Highlights:

• The Trump administration slapped tariffs on roughly $110 billion in Chinese imports on Sunday, marking the latest escalation in a trade war that’s inflicting damage across the world economy. China retaliated.
  • Face-to-face talks between Chinese and American trade negotiators scheduled for Washington in September are still happening “as of now,” Trump told reporters Friday
  • China’s top trade negotiator, Vice Premier Liu He, said his nation “firmly opposes” the U.S.’s escalation of the trade war between the two nations after Trump raised tariffs on Chinese goods and told American companies to move out of China. Two top White House officials said Trump has the authority to force American companies to leave China
  • Trump said China has asked to re-start trade talks, hours after Beijing’s top negotiator publicly called for calm in response to the tit-for-tat tariff increases. Trump said China wants to make a deal as he praised the comments by the country’s chief negotiator
• China has ample tools to retaliate but thinks it should discuss removing the new tariffs with the U.S., Commerce Ministry spokesman Gao Feng said
  • China’s economy slowed further in August as weak domestic conditions, intensifying tensions with the U.S. and worsening global trade all combined to undermine the outlook
• Treasury Secretary Steven Mnuchin said the Trump administration doesn’t intend to intervene in the dollar market right now, but signaled he’d prefer any future move be coordinated with the Federal Reserve and global allies
  • Mnuchin also said U.S. trade officials expect Chinese negotiators to visit Washington, but wouldn’t say whether a previously planned September meeting will take place
• Argentina’s bonds fell to new record lows on investor skepticism that a plan unveiled Wednesday to delay payments on as much as $101 billion of debt would prevent a fully-fledged default
  • The government will postpone $7 billion of payments on short-term local notes held by institutional investors this year and will seek the “voluntary re-profiling‘’ of $50 billion of longer-term debt. It will also start talks over the repayment schedule on $44 billion it has received from the IMF
  • The central bank said commercial banks must ask permission to distribute dividend payments as policy makers struggle to halt a slump in foreign currency reserves and the peso
  • President Mauricio Macri imposed capital controls in a blunt policy reversal aimed at containing the country’s escalating financial crisis and earning a slim chance at re-election -- or at least seeing out the remainder of his presidency
• Iranian President Hassan Rouhani, whose economy is in the grip of U.S. sanctions, said Tuesday he’s not interested in talking with Donald Trump
• Emerging-market exchange-traded funds flows were on the brink of turning negative for the year as a selloff extended to a seventh consecutive week
• India has scooped up more gold for its reserves. The Reserve Bank of India raised its holdings 9.2% in the year ended June, the biggest haul in nearly a decade

Asia:

• The main risks to China’s sovereign credit fundamentals are likely to come from domestic factors, according to S&P Global Ratings
• The Bank of Korea left its key interest rate unchanged at 1.5%, as expected by the majority of economists in a Bloomberg survey
  • President Moon Jae-in will invest in a local equity fund that bets on companies the government is supporting amid its trade dispute with Japan
  • The authorities to take stabilization steps if there are market concerns, regardless of the currency level, Vice Finance Minister Kim Yongbeom said
  • An unidentified senior U.S. State Department official criticized South Korea’s military training near islets also claimed by Japan, Japanese broadcaster FNN reported, citing the official
  • Vice Foreign Minister Cho Sei-young called in Japan’s ambassador Yasumasa Nagamine, urging him to withdraw export curbs against South Korea
  • South Korea’s 2020 budget proposal calls for record spending
  • Finance Ministry will issue as much as 130.6 trillion won ($108 billion) of government bonds in 2020 based on its budget proposal
• Bank Indonesia said its policy is now directed at bolstering growth in south-east Asia’s biggest economy in the face of mounting global risks
  • 2019 budget deficit was 1.14% of gross domestic product as of July
  • The government has a raft of emergency stimulus options available to bolster the economy if global conditions worsen, Finance Minister Sri Mulyani Indrawati said
  • The nation will build a new capital city on the island of Borneo, home to some of the world’s biggest coal reserves and rare orangutan habitats
  • Indonesia is bracing for a bigger-than-expected shortfall in tax collections as a global slowdown and simmering U.S.-China trade tension weigh on demand for the country’s commodities and manufactured products
• India’s central bank approved a record 1.76 trillion-rupee ($25 billion) payout to the federal government, boosting New Delhi’s coffers at a time when it is under pressure to provide a fiscal stimulus to the slowing economy
  • The country is considering pruning its borrowing after Reserve Bank of India agreed to make the payment, people with knowledge of the matter said
  • Gross domestic product growth cooled for a fifth straight quarter to 5% in the three months ended June, the slowest pace since March 2013
  • Weakness in investment and consumption activity deepened in July
  • India eased foreign investment rules in a number of sectors including retail, manufacturing and coal mining, a move that may attract investments and revive growth in the economy
  • India’s Commerce Ministry has recommended an increase in import duties on Malaysian refined palm oil after Indian refiners sought safeguard measures to protect themselves from rising shipments
• Malaysia’s government is mulling another Samurai bond that’s even cheaper than the previous one and is studying how it can use this to overcome its financial problems, according to Prime Minister Mahathir Mohamad
  • Prosecutors will seek to prove that Najib Razak acted together with fugitive financier Jho Low in their alleged roles in 1MDB, as the former premier faces his biggest trial linked to the troubled state fund
• Thailand’s government is ready to take further action to support an economy growing at its slowest pace in nearly five years, and sees room for further interest-rate cuts, the finance minister said
  • Thai industry, under pressure from currency strength and the impact of the U.S.-China trade standoff, is looking to the Bank of Thailand for an economic lifeline
  • The central bank is closely monitoring household debt and may consider measures if situation becomes “more fragile,” monetary authority said
  • The nation posted a current-account surplus of $1.8 billion in July, less than the estimated $2 billion and $3.9 billion surplus in June
• The Philippine central bank will lower its policy rate by a quarter-percentage point by the end of 2019 as planned, and assess if further cuts are needed, Governor Benjamin Diokno said
  • The Philippine Trade Department said it has started exploring emerging markets in Africa, South Asia, Central Asia and Eastern Europe as the country seeks to diversify products and expand its exports destinations
• Taiwan plans to upgrade its Tourism Bureau in a bid to increase its international visitor arrivals, Taipei-based Central News Agency reports, citing Transportation Minister Lin Chia-lung

EMEA:

• Hungary’s central bank said downside risks to the long-term inflation outlook have strengthened before a scheduled comprehensive policy review in September, a signal that policy makers may be ready to forgo further tightening and may consider the need for easing
• Poland announced Tuesday its first ever balanced budget plan. Benchmark yields fell the most in 17 months
• Romanian President Klaus Iohannis urged the ruling party to swiftly solve the latest political crisis that reduced Prime Minister Viorica Dancila’s support in parliament to a minority
• U.S. Defense Secretary Mark Esper ruled out any compromise that would let Turkey get American F-35 fighter jets if it keeps the Russian-made S-400 missile defense system
  • Russia and Turkey said they’ll deepen defense cooperation after President Vladimir Putin showed off his latest stealth fighter jet to Turkish leader Recep Tayyip Erdogan, who’s locked in a dispute with his NATO ally Donald Trump over buying new U.S. warplanes
• Mozambique plans to conclude restructuring its dollar bonds by the end of September, almost three years after first announcing the proposal
• Nigeria’s President Muhammadu Buhari warned that the country could struggle to fund its expenses unless it’s able to raise tax revenue
• South Africa could dispose of some of Eskom Holdings SOC Ltd.’s coal-fired plants and allow households to sell electricity back into the grid as part of a restructuring of the state-owned power utility
• The Bank of Israel held its key interest rate at 0.25% but looked poised to join a global monetary-easing wave, dropping a reference to a plan to lift borrowing costs gradually. The shekel weakened
• Lebanon accused Israel of attacking an area near its border with Syria and dispatching drones into the capital and said such incidents amounted to a “declaration of war.” Israel has not admitted responsibility for the attacks, the first such escalation in years between two countries that have fought multiple conflicts
• Qatar Financial Centre Regulatory Authority fined First Abu Dhabi Bank PJSC 200 million Qatari riyals ($55 million) for obstructing an investigation into suspected market manipulation by the United Arab Emirates’ biggest lender

Latin America:

• S&P Global Ratings temporarily cut Argentina’s foreign- and local-currency credit ratings to “selective default” after the government delayed debt payments; S&P upgraded the rating to CCC- on Friday since the new terms for the short-term debt came into effect immediately.
  • Officials from the IMF were in Buenos Aires to meet with policy makers and the opposition as the fund decides whether to disburse another $5.3 billion from a record $56 billion agreement
  • The IMF officials were “in the process of analyzing” the measures announced Wednesday, according to a statement
  • Many local mutual funds told regulators that they were temporarily suspending redemptions as clients rushed to pull out their money
  • An adviser close to the team of to Argentine presidential frontrunner Alberto Fernandez called for capital controls
• Brazil’s economic activity rebounded in the second quarter, laying to rest concern that faltering confidence would drag Latin America’s biggest economy back into a recession
  • Central bank increased intervention in markets, announcing a surprise auction of dollar spot on Tuesday
  • Brazilian President Jair Bolsonaro and his French counterpart Emmanuel Macron exchanged barbs over the Amazon fires
  • Unemployment rate dropped in July spurred by another increase in informal labor
• Mexico’s central bank board took aim at President Andres Manuel Lopez Obrador’s administration in its most recent meeting, saying policy uncertainty is holding back investment in Latin America’s second-largest economy
  • Central bank slashed its growth forecast for this year, predicting the weakest expansion since the 2009 financial crisis amid a slowdown in demand and global and domestic uncertainty
  • Country will allow state oil company Pemex to resume joint ventures and it will also auction deep-water exploration blocks next year, an unnamed senior government official told the Financial Times
• Chile’s economy posted signs of recovery in July after a disappointing first half of the year as manufacturing production and industrial output grew more than expected
  • The Chilean government will invest an additional $355 million this year and $216 million next to stimulate the economy, Finance Minister Felipe Larrain said

--With assistance from Philip Sanders.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Andrew Monahan

©2019 Bloomberg L.P.

With assistance from Bloomberg