Emerging Markets Turn to China for Risk-On Trigger Amid Languor

(Bloomberg) -- With China rediscovering its appetite for stimulus, the Federal Reserve promising to be patient on rates and optimism surrounding trade talks, emerging markets have good reason to start shaking off February’s lethargy.

Investors looking for the next risk-on trigger will be watching China’s annual National People’s Congress starting Tuesday, as the country’s growth target is likely to signal how much the economy has been affected by the trade war. Friday’s U.S. payrolls report will be key too, though it would only take a much higher-than-forecast reading to convince traders that Fed interest-rate increases this year are back in the cards, some economists say.

“The biggest concern for EM at the moment remains any sharp rebound in U.S. data, which would likely cause the dollar to rally and U.S. rates to rise,” said Paul Greer, a London-based money manager at Fidelity International who is overweight emerging-market currencies, local bonds and credit. “This would be a headwind for EM assets in the short term.”

A Bloomberg index that measures carry-trade returns from eight developing-nation currencies, funded by short positions in the dollar, snapped a three-month rally in February, a sign that a dollar revival could undermine bullish emerging-market bets. Mitigating that risk could be the prospect of U.S. and China finalizing a trade deal. President Donald Trump’s latest warning that the dollar was too strong supported emerging-market currencies only briefly on Monday.

Emerging Markets Turn to China for Risk-On Trigger Amid Languor

China’s Goals

  • Premier Li Keqiang will outline 2019 goals for economic expansion at the National People’s Congress
  • Some economists expect China to set a lower growth target of either about 6 percent, or from 6 to 6.5 percent -- down from around 6.5 percent for the past two years
  • “All eyes in particular will be on Premier Li Keqiang’s government work report on Tuesday outlining 2019 goals for GDP growth, the fiscal balance, inflation, money supply and credit growth,” said Greer at Fidelity International
  • The U.S. and China are close to a trade deal that could lift most or all U.S. tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products, two people familiar with the discussions said
  • U.S. and Chinese officials “have conducted fruitful and intensive consultations and made important progress on many issues of common concern,” Zhang Yesui, a spokesman for the NPC told reporters in Beijing on Monday
  • The yuan strengthened for a fourth month in February, its longest winning streak since January 2018
  • The currency is approaching a key technical level against the dollar, a break of which is set to fuel further gains in the yuan. China’s currency has rallied the five times it definitively crossed the 50-week moving average since 2009
Emerging Markets Turn to China for Risk-On Trigger Amid Languor

Whither Rates?

  • Policy makers in Turkey, Poland, Peru and Malaysia will decide on interest rates this week. Economists expect all of them to remain on hold following a dovish Federal Reserve
  • In Mexico, consumer confidence and inflation data take on added importance after the central bank cut growth forecasts amid an unexpected tumble in retail sales -- fueling speculation on rate cuts. The swap market is showing bets on a decline in borrowing costs in the second half of 2019
  • Inflation data from Russia, South Korea, the Philippines, Colombia, Hungary, Taiwan will also help investors assess the outlook for monetary policy
    • In Turkey, annual price growth last month dipped to the slowest in half a year, with a sputtering economy and a more steady currency setting the stage for further disinflation ahead
  • Trade figures from China on Friday will keep markets on their toes after the official gauge of factory output showed a further contraction in February. Similar data will also be reported by Taiwan on Friday. Malaysia’s January exports released on Monday surprised with a year-on-year gain of 3.1 percent compared with expectations for a decline

Reality Check Post Carnival

  • Latin America is set for a quiet start to the week, with markets in Brazil, the region’s biggest economy, closed through Wednesday for Carnival. When traders return from the holiday, they’ll sift through the central bank’s weekly survey after a report last week showed a slump in activity. Similar data from the Argentine monetary authority may show further deterioration in the outlook for consumer prices, growth and the peso
  • Investors will also watch Brazilian President Jair Bolsonaro’s moves on pension overhaul negotiations, with talks expected to gain more traction after the holiday. After the first proposal got a cool reception in Congress, he’s rethinking his strategy, and markets expect the plan to be watered down to secure support

Romania’s Bank-Tax Row

  • Romanian Prime Minister Viorica Dancila will speak in Parliament on Monday and may announce changes to a tax on banks and other industries that’s shaken investors and triggered a market crash
  • Read more: Romania Said to Retreat in Bank-Tax Row to Save Debt Grade

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