Emerging-Market Traders Brace for Pain After U.S. Hikes Tariffs

(Bloomberg) -- With the U.S. increasing tariffs on Chinese goods Friday, emerging-market investors are bracing for more volatility after a week that’s sent shock waves through risk assets.

Tariffs on more than $200 billion in Chinese goods rose to 25% from 10% as of midnight New York time on Thursday. The move came even after U.S. President Donald Trump insisted a trade deal was still possible this week.

While an optimistic tone before the tariff hike had helped trim some of Thursday’s losses, and indexes of developing-market currencies and equities maintained intraday gains Friday after the U.S. move, it wasn’t enough to make much of a dent in weekly declines. Stocks are down in all major emerging markets this week, paced by a plunge in Chinese shares.

Only six of the 24 developing-nation currencies tracked by Bloomberg have strengthened versus the dollar this week. MSCI’s gauge for emerging market stocks posted its worst weekly decline this year.

“Sell the rumor buy the fact,” said Edwin Gutierrez, a money manager at Aberdeen Asset Management in London. “Tariffs are here, people sold into the lead-up and are now covering shorts. And others are buying because it’s now in the price.”

Impossible to Predict

“Volatility is the name of the game,” said Michael Reynal, a portfolio manager at Sophus Capital in Des Moines, Iowa. “It’s difficult to tell if the wave of news out of Washington is short-term tactical moves -- a la ‘art of the deal’ -- or part of a longer-term strategy to genuinely shrink Chinese links to the U.S. economy.”

Failure to reach a deal would hit most emerging-market currencies, said Brendan McKenna, a currency strategist at Wells Fargo in New York, adding that the Mexican peso, the Brazilian real and Asian currencies would likely suffer most.

Following the deadline, China immediately said in a statement it would be forced to retaliate, but didn’t specify how. The move came after discussions between Xi Jinping’s top trade envoy and his U.S. counterparts in Washington made little progress on Thursday, with the mood around them downbeat, according to people familiar with the talks. The negotiations resumed on Friday morning.

Read more: 25% Tariffs Would Bloody China Exporters

Bulltick LLC analysts Kathryn Rooney Vera and Gregan Anderson remained positive on emerging markets, saying a deal was “within reach” and the uncertainty in the trade negotiations “should be regarded as normal.”

Other Risks

Either way, some investors are trimming back bullish bets amid other potential risks to emerging-market assets ranging from a fresh inversion in the U.S. yield curve to a slowdown in global growth, recent strength in the dollar and a slump in commodity prices.

“EM will remain challenging as long as the dollar is strengthening,” said Jordi Visser, chief investment officer at the $1.7 billion-hedge fund Weiss Multi-Strategy Advisers in New York. “At some point soon, I expect the dollar to begin a weakening trend. For that to occur, the Fed will need to begin to move though.”

Investors shouldn’t count on central bankers coming soon to their rescue, even though they have already shifted to a dovish stance, according to Rebecca Patterson, chief investment officer at New York-based Bessemer Trust.

“For them to provide an additional lift to sentiment and risk assets, we’d probably first need to see signs of economic pass-through from the trade war and/or much lower inflation,” Patterson said. “They would have to do even more than what is already discounted in the markets.”

--With assistance from George Lei, Ben Bartenstein and Alec D.B. McCabe.

To contact the reporters on this story: Julia Leite in Sao Paulo at jleite3@bloomberg.net;Justin Villamil in Mexico City at jvillamil18@bloomberg.net;Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, ;Justin Carrigan at jcarrigan@bloomberg.net, Cormac Mullen

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