Stocks show mostly losses at the Istanbul Stock Exchange (IMKB) in Istanbul, Turkey. (Photographer: Staton R. Winter/Bloomberg News)

Emerging Markets at Mercy of Trade and Fed After Painful 2018

(Bloomberg) -- Until a trade dispute between the U.S. and China is resolved, a single tweet on the matter will have the power to ignite rallies and sell-offs.

The tweet in question this week is President Donald Trump’s declaration that “big progress” is being made toward a deal between the U.S. and China, and it may spur gains across emerging markets. The message comes about 10 days before a U.S. government delegation is said to plan a trip to Beijing in the week of Jan. 7 for the first face-to-face discussion between the two sides since early December.

Investors will also be on alert when Federal Reserve Chairman Jerome Powell joins his predecessors for an interview on Friday as derivatives traders bet that the central bank won’t hike interest rates in 2019. Some see the next move as a cut in 2020.

“Emerging markets have been particularly hard hit so I expect to see a relief bounce in January,” said Tarek Fadlallah, the Dubai-based chief executive officer at Nomura Asset Management Middle East. “But where do we go after the relief bounce? I think nowhere. The reason why interest rates are not going up in the U.S. is because the economy is not going to be very strong.”

Stocks, bonds and currencies across developing nations are poised for their worst annual performance in three years. The outlook for China’s economy is also key for developing-nation assets, Fadlallah said

Emerging Markets at Mercy of Trade and Fed After Painful 2018

China Slowdown

  • The December purchasing manager index for the manufacturing sector showed the first contraction since 2016 amid the threat of a prolonged trade war
    • The manufacturing PMI dropped to 49.4 in December from 50.0 in November
    • The non-manufacturing PMI rose to 53.8 from 53.4, suggesting recent stimulus efforts may be starting to have some effect
  • Read: PBOC Signals Monetary Policy May Not Ease as Much as Some Hope
  • China will lower import taxes on more than 700 goods from Jan. 1 in a third round of tariff cuts, part of its efforts to open up the economy and reduce costs for domestic consumers

What Else to Watch Out For

  • Brazil’s President-elect Jair Bolsonaro will take office Tuesday. Markets are hoping the populist leader can tame government spending and usher in a new era of fiscal conservatism. The real has underperformed all of its emerging-market peers since Bolsonaro’s victory in late October
  • In Argentina, a central bank survey of economists due Thursday will provide investors with some indication of whether a government plan to freeze the amount of pesos in circulation will bring inflation expectations down for a third straight month. The peso is among the world’s best performing currencies in the last quarter of 2018
  • Turkey publishes trade-balance data for November on Monday. The median estimate in a Bloomberg survey expects the economy to post a $600 million deficit, wider than the $460 million shortfall in October. That’s still one of the smallest monthly trade gaps since an economic contraction in 2009
    • The nation’s inflation data for December is due on Thursday. Consumer-price growth may decelerate for a second month to 20.6 percent, according to the median estimate in Bloomberg’s survey
  • South Korea’s trade data due Tuesday and Malaysia’s on Friday will be watched for evidence of the trade war’s impact on exports
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