EM Review: U.S. Data Sent Stocks Lower and Currencies Higher

(Bloomberg) -- Emerging-market stocks fell for a third week last week as poor U.S. manufacturing data stoked concerns about faltering growth. Those same figures gave developing-economy currencies a fillip though, bringing a two-week decline to an end, on increased bets the Federal Reserve will cut rates further. A lack of positive news in the trade war and U.S. political front kept investors cautious about taking on more risk.

The following is a roundup of emerging-markets news and highlights for the week ending Oct. 6.

Read here our emerging-market weekly preview, and listen to our weekly podcast here.

Highlights:

• The Trump administration has issued a partial -- and qualified -- denial of reports that it is discussing the imposition of limits on U.S. investments in Chinese companies and financial markets
  • Chinese officials are signaling they’re increasingly reluctant to agree to a broad trade deal pursued by President Donald Trump, ahead of negotiations this week that have raised hopes of a potential truce
  • The U.S. Commerce Department slapped more duties on wooden cabinets and vanities from China in a sign of the challenges awaiting negotiations when the two countries resume trade talks
  • Trump said that China’s Xi Jinping should consider investigating Joe Biden and his son after again calling on Ukraine’s president to re-open an investigation into one of his top political rivals
• Federal Reserve Chairman Jerome Powell, who’s noncommittal about further interest rate cuts, is facing greater pressure to make a third-straight reduction in response to weakening data, volatile markets and a continued bashing from Trump
  • Powell said the U.S. economy is in a good place, though it faces some risks
  • U.S. nonfarm payrolls expanded by 136,000 in September, slightly missing estimates, while August’s reading was revised upward. Wage gains cooled and the unemployment rate fell
  • U.S. ISM factory index slipped to 47.8 in September, the lowest since June 2009, missing all estimates
  • Markets placed about a 75% chance of a rate reduction at the October meeting after the jobs report on Friday, compared to 85% Thursday and 40% on Monday
• Trump’s personal lawyer, Rudy Giuliani, Secretary of State Michael Pompeo and Attorney General William Barr were all drawn deeper into the House impeachment inquiry after new details of the administration’s foreign contacts emerged
• China said it would continue to open up its financial markets and encourage foreign investment
  • The health of China’s manufacturing sector improved in September, although it was still below the line indicating contraction. The manufacturing purchasing managers’ index rose to 49.8
  • China’s onshore financial markets have been shut for a week-long holiday from Oct. 1 through Oct. 7
• North Korea and the U.S. have agreed to hold working-level talks on Oct. 5., Korean Central News Agency says, citing a statement from vice foreign minister Choe Son Hui
  • North Korea fired what appeared to be a ballistic missile designed for submarines, testing Trump’s tolerance for weapons tests just hours after agreeing to restart stalled nuclear talks with the U.S.
  • South Korean President Moon Jae-in’s office is preparing for the possible visit by North Korean leader Kim Jong Un in November, Tak Hyun-min, Moon’s planning advisory committee member, said
  • North Korea called the first test of its new submarine-launched ballistic missile a major boost for its national security
  • North Korea said it’s not keen to hold more talks with the U.S. until measures are taken to withdraw Washington’s “hostile policy” toward Pyongyang, South Korea’s Yonhap News Agency reported
• India’s central bank cut its key interest rate for a fifth straight time this year, moving aggressively to revive economic growth as the banking system faces new stresses
  • The RBI lowered its full-year growth forecast for a fourth time to 6.1% from 6.9% previously.
• Saudi Aramco sought to underpin the targeted $2 trillion valuation for its initial public offering by increasing dividends, paying less tax and finding cornerstone investments from major Asian oil producers
• Turkish inflation slowed sharply into single digits, possibly setting up another confrontation between the central bank and President Recep Tayyip Erdogan, who signaled that he expects interest rates to be cut further
• Brazil’s Senate concluded its first full vote on a pension reform proposal that was weakened by a last-minute amendment, reducing the impact of President Jair Bolsonaro’s main initiative to tame a rising debt load
• Egypt will raise its share of longer-dated debt to 40% of annual domestic issuance by the end of the current fiscal year, from 5% in 2017-18, Finance Minister Mohamed Maait said
• The biggest emerging-market bond ETF suffered the largest two-day outflow since February 2018 and Morgan Stanley said withdrawals might pressure developing-nation high-yield sovereign bonds

Asia:

• Xi kicked off a parade marking 70 years of Communist rule in China
  • Xi called for stability in Hong Kong, unity among Chinese ethnic groups, and the “complete unification” of the country
  • Hong Kong invoked colonial-era emergency powers for the first time in more than half a century to ban face masks for protesters in a bid to quell months of violent unrest
• Downside risks in South Korea’s economy are outweighing upside ones, making it increasingly hard for the central bank to maintain its growth forecast that was already cut earlier this year, according to Governor Lee Ju-yeol
  • Consumer prices fell for the first time in September, underscoring the hit to domestic demand as the economy grapples with declining exports. Overseas shipments decreased 11.7% in September from the previous year
  • Industrial production fell an annual 2.9% in August, the biggest decline since February
• India’s government maintained its borrowing plan for the remainder of this fiscal year to restore calm in the market after a $20 billion stimulus triggered a sell-off in local bonds
  • The government is considering a proposal to ease foreign investment limits in government bonds, Reuters reported, citing people it didn’t identify
  • The current-account deficit shrank to $14.3 billion in the April-June period, or 2% of gross domestic product. The gap in the year-ago period was $15.8 billion, or 2.3% of GDP
  • U.S. Commerce Secretary Wilbur Ross said there was no structural reason a U.S.-India trade deal could not be done soon
• Speculation on Thailand’s currency has subsided after central bank measures and a rate cut in August, Governor Veerathai Santiprabhob said, adding the currency has strengthened mainly on the country’s current-account surplus, foreign direct investment, and tourism
• Inflation in Indonesia and Thailand weakened in September, providing policy makers ample room to keep lowering interest rates to spur growth
• Indonesian President Joko Widodo said the wave of protests sweeping the country over his government’s controversial legislative agenda would not derail reforms aimed at bolstering growth
  • Widodo said he’ll introduce sweeping changes to labor rules by the end of the year and open up more sectors of the economy to foreign investment
  • He also said the resources powerhouse wants to process more crude palm oil domestically
• Inflation in the Philippines slowed to 0.9% in September, the lowest since 2016, from 1.7% in August
  • Economic growth likely bounced back to the 6% level last quarter as inflation cooled, giving the central bank room to pursue more monetary easing this year, Economic Planning Secretary Ernesto Pernia said
• Malaysia sees sustainable growth in the second half of 2019 and the ruling coalition’s presidential council will decide on whether to revive GST, Finance Minister Lim Guan Eng said

EMEA:

• The South African Reserve Bank’s ability to cut interest rates to boost the economy is limited by political and policy uncertainty and inflation that’s still not sufficiently anchored at the midpoint of its target range, the central bank said in its bi-annual Monetary Policy Review
  • The nation’s ruling party approved a range of proposals to revive economic growth, but stopped short of endorsing Finance Minister Tito Mboweni’s controversial plan to sell some state assets
  • Its trade balance swung to its biggest surplus in eight months in August as mining exports surged
• Kenya’s economic growth remained unchanged in the second quarter as a drought weighed on agriculture
• Ukraine sold 77.2 million hryvnia ($3.1 million) in local debt at its weekly sale on Tuesday, the least since January. Political turmoil is tainting the best currency rally this year
• Erdogan expressed his readiness to act alone in northeast Syria and retake areas from American-backed Kurdish forces, saying that efforts to defuse the threat they pose to Turkey have failed
  • Turkey reinforced army units at the Syrian border hours after Erdogan signaled an imminent cross-border operation against U.S.-backed Kurdish militants in Syria, state media reported
• Polish banks suffered a setback in a ruling by the European Union’s top court on unfair terms in foreign-currency loans while avoiding a worst-case scenario
• Moody’s Investors Service raised the Czech Republic’s credit rating by one notch to Aa3, the fourth highest investment grade, from A1
• Failed efforts to ease U.S.-Iran tensions on the sidelines of the United Nations have left both sides hardening their positions and diplomats warning of growing mistrust and a risk of escalation
  • Saudi Crown Prince Mohammed Bin Salman warned that war between his country and Iran would lead to a “total collapse of the global economy”
• Lebanon was placed on review for a rating downgrade by Moody’s Investors Service, which said that the country’s increased reliance on foreign-exchange reserves could potentially destabilize its decades-old currency peg
  • Lebanese central bank Governor Riad Salameh attributed the recent hike in demand for dollars to increased imports and affirmed the country’s commitment to the currency peg
• Saudi Arabia is turning to Shariah-compliant investors for its third international debt sale this year as the tide begins to turn against the kingdom
  • The nation was downgraded for a third time since 2016 by Fitch Ratings, which warned about entrenched budget deficits and cited the kingdom’s vulnerability to military threats following the biggest attack ever on its oil industry
  • The kingdom’s non-oil economic growth accelerated in the second quarter, a sign that the economy is shrugging off the effects of austerity measures that followed the collapse of crude prices five years ago
• Egypt’s finance minister is presiding over the Middle East’s fastest-growing economy, earning accolades from investors and international finance institutions alike. He’s got one big problem: improved indicators are failing to translate into higher incomes and living standards for the Egyptian people
• Zambian Finance Minister Bwalya Ng’andu plans to obtain almost 10% of the southern African nation’s total income next year from undisclosed sources, raising concerns about the accuracy and sustainability of government spending plans for 2020

Latin America:

• Brazil’s industrial output expanded more than forecast in August, in what was seen by Morgan Stanley as a signal that the economy may have bottomed
  • Nation’s net debt to GDP ratio fell to 54.8% in August from 55.8% in the previous month
  • Brazil economists reduced their forecast for the benchmark interest rate at the end of the year to 4.75% from 5% the week before
  • Second-round vote on the pension reform bill in Senate was delayed to later this month
  • Brazil and Argentina signed a new trade agreement for the automotive industry
• Peru’s President Martin Vizcarra dissolved the opposition-controlled Congress and called a parliamentary election in a bid to end the political gridlock over his plans to stamp out corruption
  • Vice President Mercedes Araoz resigned one day after being sworn in by lawmakers as the country’s interim president, strengthening Vizcarra’s hand against the Congress
  • Vizcarra promoted budget chief Maria Antonieta Alva to Finance Minister as he forms a new cabinet following a no-confidence vote
  • Peru dollar bonds proved resilient to the political noise and government is planning to issue a green bond for the first time
• Mexico is renewing an IMF credit line to face any contingencies, President Andres Manuel Lopez Obrador said
  • Line will likely range between $60 billion and $70 billion
  • Trump said House Speaker Nancy Pelosi is “incapable of working on” prescription drug prices and the USMCA trade agreement with Mexico and Canada; Pelosi said Democrats want the deal “when it’s right”
  • Mexico’s deputy finance minister Gabriel Yorio said U.S. impeachment process raises risks for USMCA
  • Lopez Obrador said the replacement of 10 executives at the Petroleos Mexicanos arm that sets and monitors prices was an effort to end decades-long questionable practices
  • Finance Minister Arturo Herrera said Mexico is close to concluding Pemex’s refinancing in three parts
  • Nation’s January to August budget deficit totaled 118.1 billion pesos ($6 billion), down from 230.8 billion pesos in the same period last year
• Argentina’s Supreme Court ruled Tuesday that cuts in income and VAT taxes can’t affect funds transferred from the national government to the provinces; Moody’s said ruling is credit positive for Provinces
  • Economists cut their Argentina growth forecasts for this year and next, while they expect the peso to weaken even more than previously and inflation to remain high
  • Matias Kulfas, an economic adviser to opposition candidate Alberto Fernandez, said Argentina needs voluntary debt talks and to avoid unilateral default
  • Fernandez said that the nation’s creditors are open to a debt reprofiling because they understand Argentina can’t currently pay
  • Government has used $1.9 billion since last Friday from an IMF loan approved in June 2018 in order to pay down debt
• Venezuela’s government is ready to resume negotiations with foreign investors on about $60 billion of defaulted debt, according to President Nicolas Maduro
• Colombia’s central bank expects to see an acceleration in the pace of growth in the second half of 2019, according to the minutes of their last meeting
  • Finance Minister Alberto Carrasquilla urged the central bank to act if the weaker peso has a strong pass-through effect on consumer prices
  • Nation’s urban unemployment rose to 11.4% in August
• Chile’s economic activity expanded at the fastest pace in 10 months, beating all estimates on the back of jumps in both the mining and non-mining sectors
• Ecuador’s President Lenin Moreno declared a state of emergency as protesters barricade roads across the country over fuel price hikes

--With assistance from Selcuk Gokoluk, Colleen Goko and Philip Sanders.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Karl Lester M. Yap

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With assistance from Bloomberg