Geopolitical Risks Come to Fore as Rally Loses Steam: EM Review

(Bloomberg) -- Emerging-market stocks and currencies trimmed their 2019 advance as geopolitical risks resurfaced and concern over U.S.-China trade talks lingered.

The following is a roundup of emerging-markets news and highlights for the week ending March 3.

Asset Moves WeeklyFebruary
MSCI EM stocks index-0.7%+0.1%
MSCI EM FX index-0.1%-0.5%
Bloomberg Barclays Global EM Local Currency bond index-0.02%-0.3%

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Highlights:

  • President Donald Trump said Saturday that the U.S. dollar is too strong and took a swipe at Federal Reserve Chairman Jerome Powell as someone who “likes raising interest rates”
  • U.S. officials are preparing a final trade deal that Trump and his Chinese counterpart Xi Jinping could sign in weeks, according to people familiar with the matter
    • Trump said the two sides were “getting very very close” in trade talks
    • Trade representative Robert Lighthizer took a more cautious tone Wednesday, telling lawmakers that a lot of work still needs to be done before any trade pact is signed, and that implementing it would be a tough task
  • Powell said in testimony to the Senate that a healthy U.S. economy has faced “crosscurrents and conflicting signals.” His remarks showed no bias toward further interest-rate increases or cuts
  • Trump said he walked out of his second summit with Kim Jong Un after the two leaders failed to agree on a deal that would see Pyongyang give up much of its nuclear weapons program in exchange for an easing of U.S. sanctions
    • Kim vowed to meet again with Trump to continue negotiations
  • The U.S. economy expanded an annualized 2.6 percent in the fourth quarter, more than analysts had expected
  • An Indian Air Force pilot captured by Pakistan was released on Friday, offering the two countries a chance to de-escalate the worst military tensions in decades
  • MSCI Inc. said it will expand the weighting of China-listed shares on benchmark indexes tracked by global investors
  • Muhammadu Buhari won a second term as president of Nigeria with promises to revive the economy and tackle security threats including an Islamist insurgency. Opposition leader Atiku Abubakar said his legal team to challenge the result of election is in place
  • Brazil’s new central bank president, Roberto Campos Neto, signaled policy continuity in his hearing at the Senate before he was confirmed for the role, maintaining the focus on inflation and indicating that he supported the current neutral policy stance
  • The U.S. is discussing with the International Monetary Fund and other institutions about providing financial assistance as well as official loan programs to Venezuela, the Financial Times reported

Asia:

  • China’s central bank set the yuan at the strongest level in seven months in a daily fixing Wednesday, following a stock rally Feb. 25 that was the biggest since 2015. The Shanghai Composite Index was among the best performers in the world in February
    • The first official gauge of China’s manufacturing sector in February indicated that activity contracted further, with the purchasing managers index remaining below 50 for a third month. A day later, the Caixin PMI manufacturing came in at 49.9, better than the estimated 48.5
    • China is considering tax breaks to attract more global funds to register in the country and reverse swelling outflows to international tax havens, people with knowledge of the matter said
    • The government will step up real-time monitoring of the stock, bond and currency markets to prevent cross-market and cross-border risks, Wang Jingwu, head of the Financial Stability Bureau at the People’s Bank of China, was cited in the Financial News as saying
  • India’s economy slowed last quarter, with little sign of an early recovery amid rising political tensions with Pakistan and weaker global demand
  • The Bank of Korea kept its benchmark interest rate unchanged at 1.75 percent, in line with expectations
    • U.S. and South Korean militaries said they will end some joint drills
  • Bank Indonesia Governor Perry Warjiyo said the policy rate was almost at its peak
    • The central bank will allow the rupiah to strengthen further as it’s currently undervalued against the dollar, said Nanang Hendarsah, executive director for monetary management
    • The nation’s stock exchange plans to cut the minimum trading price for shares and shrink the lot size in a drive to attract more retail investors and boost volumes
  • The baht was among the worst performers in emerging markets for the week; Thailand’s Constitutional Court said it will rule on disbanding the Thai Raksa Chart party, which is linked to exiled former premier Thaksin Shinawatra, on March 7. The Election Commission is seeking to break up the party, alleging hostility toward the constitutional monarchy
  • Malaysia’s government said the decline in consumer prices in January for the first time in a decade wasn’t a repeat of the deflationary period that hit the economy in the aftermath of the global financial crisis
  • Leading Taiwan presidential candidate Eric Chu pledged to improve ties with China, casting his potential rematch against incumbent Tsai Ing-wen as a chance to reset relations with the mainland
  • The Philippine peso was the best performer in Asia in February; Finance Secretary Carlos Dominguez said Thursday he would “soon” present to President Rodrigo Duterte a list of candidates for the central bank governor post. In the meantime, Deputy Governor Cyd Tuano-Amador will be the central bank’s officer-in-charge
    • The central bank says consumer prices probably rose between 3.7 percent and 4.5 percent from the year earlier in February

EMEA:

  • Russia held its biggest local-debt auction on record and foreigners boosted their holdings of the debt for the first time in almost a year, even as the threat of U.S. sanctions lingered
    • President Vladimir Putin defended the decision to prosecute U.S. fund manager Michael Calvey on fraud charges in a case that’s shaken investors and drawn criticism from top Kremlin insiders
  • Hungary’s central bank kept rates unchanged and repeated signals that an increase in borrowing costs was around the corner
  • The zloty was among the top performers; Poland’s ruling nationalists unveiled plans to boost subsidies for families and spending on pensions as part of an election-year stimulus package worth as much as 40 billion zloty ($10.6 billion)
  • Turkey’s trade deficit contracted 73 percent in January from a year earlier as imports fell and exports rose. Tourist arrivals climbed 5.3 percent from a year ago
    • Government is said to be working on a plan to bolster the capital levels of state-owned banks to keep fueling cheap credit
  • Romania’s Finance Minister Eugen Teodorovici said he hopes to reach an agreement on potential changes to a controversial fiscal plan as soon as possible after holding talks with the banking association, private pension funds and government ministers
    • S&P Global Ratings said Friday that Romania had appealed its credit outlook and the ratings company planned to resolve the matter within two weeks
  • Kenya may consider taking full ownership of its national carrier to ward off competition from other state-owned airlines on the continent and from the Gulf, according to Transport Principal Secretary Esther Koimett
  • Kuwait is planning to create a $10 billion fund with China to invest in the two countries, according to people with knowledge of the matter

Latin America:

  • The Brazilian real slumped for a second week; economic growth slowed in the fourth quarter, underscoring the challenges facing President Jair Bolsonaro as he attempts to kick-start expansion
    • An opinion poll showed a majority of Brazilians are unhappy with the interference of Bolsonaro’s family in state affairs
    • Mining authorities have started a probe into iron ore producer Vale SA that could lead to a fine of up to 20 percent of their 2018 gross revenue. The company was downgraded to junk following a deadly dam collapse earlier this year
  • Venezuela’s opposition leader Juan Guaido met Bolsonaro in Brasilia on Thursday after several days in Colombia for meetings
    • The U.S. warned Guaido’s safety is at risk as he prepares to return home
    • The finance team working with Guaido is said to be leaning toward asking the U.S. for permission to use an escrow account to pay a bond from the state oil company PDVSA that’s backed by Citgo
  • Mexican retail sales unexpectedly fell in December, adding to evidence of a weakening economy
    • Nation had its outlook lowered to negative from stable by S&P on lower growth prospects
    • The central bank cut its 2019 GDP growth forecast to a range of 1.1 percent to 2.1 percent
    • State-run oil producer Pemex posted a smaller loss in the fourth quarter
  • Argentina’s economic activity index fell more than expected in December
    • The peso traded close to the lower bound of the central bank non-intervention zone amid a thin local agenda
  • Chile’s unemployment rate rose as the labor market struggles to catch up with an economic rebound that started in the first half of last year
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