New Front in Trade War Means No Reprieve for Emerging Markets
A pedestrian walks past an e-rickshaw driver, center, and a cycle rickshaw puller, right, waiting for passengers at a stand in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

New Front in Trade War Means No Reprieve for Emerging Markets

(Bloomberg) -- Emerging markets are heading into the fourth quarter in the shadow of one of the most perilous phases in the U.S.-China trade dispute.

Bloomberg’s report last week that the Trump administration is said to be considering choking off portfolio flows to China has posed a fresh riddle for traders at the start of a week that includes an Indian interest-rate decision and a key Turkish inflation reading. And U.S. payrolls numbers come Friday.

Read: China Markets to Test Risk of Most Extreme U.S. Threat Yet

“It is not yet clear how serious the proposal is, but if it happens it would open up a brand new front in the war with China,” James McCormick, global head of strategy at NatWest Markets Plc in London, wrote in a report. “Having already significantly disrupted the global trading system, doing the same to global capital markets would be a huge risk.”

Developing-nation currencies are headed for their weakest quarter since the three months ended June 2018 as the U.S-China trade skirmish threatens to derail already fragile global growth. The yuan, poised for its worst September since 2012, will probably continue to set the tone for traders as its correlation with other emerging-market currencies remains near the record high reached in July.

New Front in Trade War Means No Reprieve for Emerging Markets

BNP Paribas Asset Management expects “a lot of volatility” in developing-nation currencies as it remains focused on Argentina ahead of the country’s Oct. 27 election, trade tensions and central bank policy decisions, said Jean-Charles Sambor, the firm’s London-based deputy head of emerging-market fixed income.

China Celebrations and Trade

  • Investors will be on the lookout for hints of change in policy direction by President Xi Jinping on Tuesday as he marks the 70th anniversary of the People’s Republic of China with a speech outlining his vision for the future
  • Onshore Chinese markets will be closed for the annual Golden Week holidays, to reopen on Oct. 8
  • President Donald Trump earlier delayed the increase of tariffs on $250 billion of Chinese imports from Oct. 1 to Oct. 15, citing the anniversary celebrations, but is also probably holding out ahead of the high-level U.S.-China trade negotiations that begin in the second week of October.

Manufacturing Outlook

  • The official and Caixin manufacturing PMIs for September both beat economists estimates, rebounding from August prints, although the official estimates at 49.8 is narrowly below the 50 threshold which divides expansion from contraction
    • Read more: CHINA REACT: Sub-50 PMI Shows Headwinds to Industry Persist
  • With Chinese PMI rebounding, manufacturing PMIs due Tuesday from Taiwan, South Korea, India, Indonesia and other South East Asian countries will come in focus

Central banks

  • The majority of economists surveyed are expecting the Reserve Bank of India to trim repo rates by 25 basis points to 5.15% on Friday, following the 110 basis points of cuts enacted so far this year. The nation’s economy is running below its potential, with the responsibility of closing the negative output gap largely falling on the central bank, according to Abhishek Gupta, Bloomberg’s Mumbai-based economist for India.
    • The rupee is the Asia’s best-performing currency this month
  • Investors will be eyeing the release of the Bank of Thailand’s minutes from the September review on Wednesday. Policy makers voted unanimously to leave rates unchanged then, following the surprise cut in August
  • In Colombia, official minutes on Monday are expected to support expectations that the central bank will maintain interest rates for now. Unemployment numbers coming earlier that day are forecast to show the urban unemployment rate rising in August on a year-on-year basis
  • Policy makers in Poland and Romania set to keep rates unchanged on Wednesday and Thursday, respectively

Data and Events

  • Turkey’s inflation probably fell to 9.8% in September from 15% in August, reflecting base effects linked to the currency
    • Inflation is likely to bottom out in October as base effects become inflationary thereafter, according to Bloomberg Economics, which sees room for interest rates to fall by a further 50 basis points this year
    • The lira is the best performer in emerging markets this month after the Argentine peso and Russian ruble
  • Russia’s inflation likely slowed further to 4% from 4.3%, giving the central bank more score to keep easing
  • South Korea’s September inflation year-on-year print due Tuesday is expected to dip into negative territory for the first time, after the previous low of 0% in August
    • On the same day, Indonesia and Thailand’s CPI readings are to be released, with the latter forecast to come in below 1% for a fourth consecutive month, below the Bank of Thailand’s inflation target of 1%-4%
    • Philippine price levels are due on Friday, with previous month’s inflation the lowest in around three years, while Taiwan’s CPI is due on Saturday
  • Investors will be eyeing the impact of existing tariffs on export numbers from Thailand, Malaysia and South Korea
  • Brazil’s landmark pension overhaul bill, the subject of investor speculation for months, takes another step toward approval when the Senate’s constitution committee is expected to approve it before it moves to a first plenary round of voting. Meanwhile, industrial production data for August will be scoured for clues on the economy’s health when it’s released Tuesday. The real was among the biggest losers among Latin American currencies in the third quarter
  • Mexico’s Finance Ministry will release its August budget balance on Monday as investors and economists look for signs spending is finally kicking in to jump-start the economy. The peso ranked among the best performers in emerging markets this month
  • August unemployment and copper output data in Chile will also be released Monday as investors search for clues about what the central bank will decide at its next meeting in October. Economic activity data on Tuesday could also provide more clarity.

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.