Emerging Markets Look Past Trade Woes, Wonder Who'll Blink First

(Bloomberg) -- The world’s two biggest economies signaled they have no intention of retreating from a trade war -- and that leaves emerging-market analysts and investors wondering which side will ultimately blink first.

“Clearly, China will not back down. Too much loss of face,” said Tony Hann, a money manager at Blackfriars Asset Management Ltd. in London. "Trump for now does not care to change his course.”

The tit-for-tat tension intensified as Washington said President Donald Trump will keep up pressure on China for trade concessions after Beijing announced further retaliatory actions against U.S. goods. Still, developing-nation assets managed to advance as traders say the latest rhetoric from officials isn’t enough to price in a full-blown trade war with major economic impact.

The MSCI Emerging Markets Index climbed 0.7 percent and most currencies in developing nations advanced as of 11:20 a.m. in New York on Friday.

China’s FX Move Is a Game-Slower, Not a Game-Changer: Macro Man
Kudlow Says Trump Won’t Back Off as China Escalates Trade War

Here’s what else analysts had to say about tariffs:

Danny Fang, an analyst for BBVA in New York:

  • "The amount is still small, and it’s pretty much tit-for-tat, which investors are already fully anticipating"
    "If China decides to impose tariff on a much larger quantity, then traders would have to price in a much higher risk of full-scale trade war. In that event, investors will have to also price in risks of growth slowdown or recession, etc."
  • "For now, I don’t think the information is new"

Ilya Gofshteyn, a currency strategist at Standard Chartered in New York:

  • "My sense is that the broader market has gotten more comfortable with the trade dispute narrative"
  • "In other words, we had outsized fear surrounding trade wars early in the year. There was total lack of follow-through in data, and so now sentiment has swung the other way"
  • "Until there is tangible evidence of damage to the global economy, the market looks willing to look through much of the news flow"

Roger Horn, EM desk analyst at SMBC Nikko Securities America in New York

  • "We haven’t actually seen much an effect on EM assets. Apart from a general macro fear of slower global GDP growth -- and we’re way too early for anything like that -- there’s just not much of a link between Chinese tariffs on U.S. goods and EM countries’ exports to China"
  • "I don’t expect medium-term repercussions from this because I don’t expect the trade dispute to continue for too long - it’s in everyone’s interest to resolve this"

©2018 Bloomberg L.P.