EM Review: Rally Resumed as Jobs Data Outweighed Virus Fears

Emerging-market stocks posted the biggest weekly gain in a month as better-than-expected U.S. payroll numbers added to optimism the world economy is recovering from the coronavirus crisis. At the same time, global infections continued to rise, slowing re-opening moves in some countries. Gains were also capped by the resurgence of U.S.-China tensions over the imposition of a new security law on Hong Kong.

The following is a roundup of emerging-market news and highlights for the week through July 5:

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Highlights:

  • The U.S. labor market rebounded more than economists predicted, yet optimism was tempered by stubbornly high layoffs and a resurgent coronavirus outbreak across the country

    • Federal Reserve officials showed no readiness at their June meeting to commit to yield-curve control, but did reveal an eagerness to provide more guidance in coming months on the future path of interest rates and asset purchases
    • Fed Chair Jerome Powell stressed to Congress that getting the coronavirus under control was vital as the world’s biggest economy rebounds from a record contraction
  • Hong Kong faced a new reality as China began enforcing a sweeping security law that could reshape the financial hub’s character 23 years after Beijing took control of the former British colony
    • China described Hong Kong’s new security law as a “sword of Damocles” hanging over its most strident critics, after Beijing asserted broad new powers to rein in sources of opposition
    • The U.S. Senate gave final approval to legislation that would impose sanctions on Chinese officials cracking down on dissent in Hong Kong. The bill heads to President Donald Trump for his signature or veto
    • The U.K. government refused to back down after China warned of “consequences” if it presses ahead with the offer of a home in the U.K. for millions of Hong Kong residents
    • Prime Minister Justin Trudeau is suspending Canada’s extradition treaty with Hong Kong, making it the first country to break law enforcement links with the former British colony since China tightened its control over the territory
  • The U.S. Federal Communications Commission designated Huawei Technologies Co. and ZTE Corp. as national security threats, a step toward driving the Chinese manufacturers from the U.S.
  • The U.S. has raised concerns over China’s decision to conduct military exercises in the contested waters around the Paracel Islands in the South China Sea, while Vietnam has also lodged a complaint with Beijing
  • An early trial of an experimental coronavirus vaccine from Pfizer Inc. and BioNtech SE showed it’s safe and prompted patients to produce antibodies against the new virus

    • The coronavirus is showing some signs of mutating in a way that may make it easier for the pathogen to spread, according to Anthony Fauci, the director of the National Institute for Allergy and Infectious Diseases
  • The Kremlin hailed as “a triumphant vote of confidence in President Putin” the overwhelming approval by voters of his bid to extend his two-decade-long rule potentially to 2036
    • President Trump is dismissing reports that Russia paid bounties to Afghan militants for killing American troops as a “hoax,” even as his administration has briefed U.S. allies on the threat and weighed possible reprisals
  • German lawmakers ended a legal standoff over the European Central Bank’s bond buying, backing a monetary program seen as a key prop for the euro area’s battered economy.
  • The World Bank projects the recession in Latin America and the Caribbean will be the worst downturn since 1901
Asset MovesWeeklyMonth of June
MSCI EM stocks index+3.4%+6.96%
MSCI EM FX index+0.4%+1.17%
Bloomberg Barclays global EM local currency bonds index+0.5%+0.81%

Asia:

  • Asia’s factory managers saw signs of hope in June, with purchasing managers indexes turning up across the board. Gauges for Indonesia and India both surged
  • China’s manufacturing activity expanded last month, signaling the country’s gradual recovery from the coronavirus slump remains on track
    • The country’s central bank is slowing down the pace of monetary easing amid signs of economic recovery, disappointing investors who have worried about tightening liquidity and rising bond yields
    • China is getting ready to allow its largest commercial banks to enter into investment banking and bond and stock deal-making as soon as this year, paving the way for them to take on Wall Street rivals
    • Imports of U.S. goods in the first five months has reached about 19% of the target for 2020 set in the phase-one trade deal, according to Bloomberg calculations based on data from China’s General Administration of Customs
    • The nation’s top bond market regulators have issued new guidelines aimed at handling defaults more efficiently and transparently, reiterating pledges to better protect investors
    • China designates Luo Huining, head of the China Liaison Office in Hong Kong, as the adviser to the city’s newly-established Committee for Safeguarding National Security, the official Xinhua News Agency reported
  • South Korea’s exports fell at a slower pace in June as economies emerged from lockdowns, offering a sign the worst of a slump in overseas demand may be over
    • The country is beefing up measures to avert a relapse of the funding strains seen during the coronavirus-induced market panic in March. Policy makers said they’re preparing tools to allow the central bank to buy U.S. Treasuries from local financial firms via repurchase agreements
    • The nation’s finance minister said the third extra budget pending approval in parliament is likely to be the last for this year and the economic shock from the coronavirus may have bottomed
    • Bank of Korea sold a net $5.85 billion to cap FX market volatility in the first quarter, the most since it started releasing the data in 2019
    • Consumer prices failed to rise in June despite cash handouts from the government to spur spending, another sign of how hard the pandemic has hit the economy
  • Rating firms in India are seeking to withdraw credit scores where issuers don’t provide enough information to support their assessments in a move that could potentially affect nearly half the country’s ratings

    • India banned ByteDance Ltd.’s short-video service TikTok and 58 other Chinese apps, citing threats to its sovereignty and security as relations between the countries worsened
    • The World Bank approved a $750 million emergency response program for India’s micro, small, and medium enterprises severely impacted by the Covid-19 crisis
    • India’s largest bank will indirectly buy debt from shadow lenders to ease a cash squeeze that threatens to destabilize the financial sector
    • Millions of migrant workers fled India’s megacities from March through May during the world’s biggest anti-Covid lockdown. Now, as the economy reopens, the effects of that relocation are rippling across the country
  • Indonesia’s central bank is close to an agreement to fund $40 billion of the government’s fiscal response to fight the coronavirus pandemic, the largest debt monetization program in emerging markets
    • Indonesia’s recent samurai bond transaction has built momentum and may potentially lead to more issuance to the Japan market, the government said
    • Indonesia is attracting global companies seeking to relocate from China with offers of speedy approvals, cheap land and gas after the economy was overlooked by firms shifting during the U.S.-China trade war
  • Thailand’s military-backed government extended the country’s state of emergency for a third time, even as a drop in coronavirus infections led officials to relax a lockdown
    • Thailand’s economy is expected to contract as much as 6% this year mainly because of the Covid-19 outbreak and trade war, with some recovery in the second half, Prime Minister Prayuth Chan-Ocha said
    • Thailand’s plan to target high-spending foreigners to kickstart its travel sector won Cabinet approval and additional support from the nation’s aviation regulator
    • Thailand’s consumer prices fell less in June than economists expected; consumer prices are forecast to fall by 1.5% to 0.7% this year against a previous estimate of a decline of 1%-0.2%
  • The 1MDB trial of Malaysia’s former leader Najib Razak was put on hold, allowing him to join the political campaign at a by-election and deliver a speech when parliament sits
    • Global bond funds correctly predicted Malaysia’s latest rating-outlook downgrade. Now they’re on guard for a possible snap election
  • The Philippine central bank governor said there’s no need to cut interest rates for the time being, allowing time for aggressive easing steps so far this year to filter through the economy

    • Philippine Finance Secretary Carlos Dominguez is seeking to further loosen movement curbs in the capital region to reignite the economy
  • Taiwan is ramping up efforts to lure bankers and other skilled workers who want to escape China’s tightening grip on Hong Kong
  • Pakistan security officials killed four gunmen who tried to storm the stock exchange building with automatic rifles and grenades, the worst terror attack in the nation’s financial hub in two years
    • Prime Minister Imran Khan blamed the attempted siege of the stock exchange on India, ratcheting up the war of words between the two nuclear-armed neighbors

EMEA:

  • Ukraine canceled a $1.75 billion Eurobond sale after the head of its central bank unexpectedly stepped down, citing political pressure against him and his colleagues
    • Ukrainian President Volodymyr Zelenskiy sought to reassure markets the central bank’s independence remains the country’s priority, as he accepted the resignation of central bank Governor Yakiv Smoliy and submitted it to parliament for approval
    • Ukraine’s outgoing central bank chief slammed lawmakers over the political pressure that prompted his decision to quit
  • Polish voters denied President Andrzej Duda’s bid for quick re-election, forcing him into a runoff with Warsaw mayor Rafal Trzaskowski that risks halting the country’s nationalist makeover. The second round will take place on July 12
    • Poland priced 2 billion euros ($2.2 billion) of three-year bonds, joining an unprecedented wave of issuance from east Europe with its first deal in the international debt markets since the start of the Covid-19 pandemic
    • Poland’s unexpectedly high inflation in June is a temporary phenomenon linked to the reopening of the economy after the coronavirus lockdown, a central banker said
  • Eastern European currencies received a boost after manufacturing PMI data for June surprised with higher than expected prints in Poland, Hungary and Russia
  • Croatia’s ruling party scored a surprise victory in Sunday’s general election, defying predictions for a tight race and putting it within touching distance of a majority in parliament
  • The Russian ruble’s record recovery in the past three months has stumbled on a familiar threat. Allegations that Russians offered bounties for the killing of American soldiers in Afghanistan have served up a reminder that the danger of sanctions hasn’t gone away
  • A pickup in Turkey’s inflation is becoming hard to ignore even for a central bank that spent almost an entire year cutting interest rates
    • Government-owned banks sold more than $1 billion on Friday to prop up the Turkish lira, according to three people with knowledge of the matter
  • South Africa unexpectedly posted a current-account surplus for the first time in 17 years as the trade surplus more than doubled before coronavirus lockdown restrictions affected outward shipments
    • The nation’s economy probably contracted 32.6% on an annualized basis in the second quarter, according to central bank forecasts. Restrictions to curb the spread of the coronavirus halted almost all activity in April and were only gradually lifted in May
  • Nigeria’s central bank devalued the naira at one of its currency auctions, according to people familiar
  • Of the five biggest economies in sub-Saharan Africa, only Ethiopia is projected to expand this year, according to a revised outlook from the International Monetary Fund
  • A Mozambique liquefied natural gas project led by Total SA has begun a process to finalize $15 billion of financing, according to people familiar
  • Business conditions in the United Arab Emirates returned to growth but deteriorated in Saudi Arabia, a sign of an uneven recovery in the Gulf as the Arab world’s biggest economies reopen after shutdowns to contain the coronavirus pandemic
  • Saudi Arabia doesn’t share the pessimism of the IMF about the outlook for its economy even as it heads for a recession following a contraction to start the year
    • The kingdom’s net foreign assets rose in May, reversing three months of declines
    • Saudi Arabia seems to have made good on its promise to cut oil production by a record amount in June
  • The IMF warned Lebanon its economic implosion is accelerating and told authorities to act urgently to pull the country back from crisis

    • Lebanese lawmakers urged the government to avoid a default on its local-currency debt and asked it to reevaluate central bank liabilities to help secure an IMF bailout
    • A key member of the Lebanese government team negotiating a bailout from the IMF resigned on Monday, the second official to quit this month as authorities struggle to come together to save an economy in free fall
  • Jordan returned to international debt markets for the first time in almost three years as the coronavirus pandemic batters its finances
  • Dubai World completed a decade-long debt restructuring ahead of schedule as the emirate prepares to tackle the economic fallout of the coronavirus pandemic
  • Iraq is in talks with the IMF for a loan and is seeking Saudi investments in its natural-gas fields, as Baghdad tries to bolster its battered economy in the face of the coronavirus and low energy prices

Latin America:

  • Brazil recorded its biggest monthly budget deficit in almost 20 years in May amid increased spending to fight the pandemic, and the Economy Ministry said gross debt will rise to 98.2% of GDP this year

    • The government extended emergency aid to informal workers and delayed municipal elections by about a month, while the state of Sao Paulo sped up the reopening of gyms and movie theaters
    • The recently-appointed education minister resigned due to inconsistencies in his resume and the Senate passed draft legislation to rein in fake news
    • Industrial production rose 7% in May from April, in line with expectations, while the unemployment rate climbed less than forecast; composite PMI rose in June
  • Colombia’s central bank surprised with a smaller-than-expected rate cut on fears about capital outflows
    • Moody’s Investors Service contradicted statements by the Colombian government that it affirmed the nation’s rating, while Fitch Ratings said it’s skeptical about the country’s ability to reduce the fiscal deficit
  • A group of top bondholders would reject an attempt by the Argentine government to move forward with a debt restructuring deal that it has been negotiating with another set of creditors, according to people familiar with the talks

    • The Argentina Creditor Committee submitted a revised debt proposal to government officials that would provide $40 billion in debt relief over the next 10 years
    • Earlier in the week, Ad Hoc and Exchange bondholder groups said they hadn’t had any meaningful talks with Argentine authorities since June 17; government said in a statement it will use the extension period until July 24 to present a “definitive” offer
    • The country’s economic activity fell a greater-than-expected 17.5% in April
  • Mexico’s Covid-19 deaths overtook Spain’s, turning the country’s outbreak into the world’s sixth most deadly; half of the country’s Covid tests turn out to be positive, indicating the virus is far more widespread than reported
    • Aeromexico filed for Chapter 11 bankruptcy protection and the CEO said financing plan could be ready in the next four to six weeks
    • President Andres Manuel Lopez Obrador’s approval rate dropped to the lowest since he took office; he will travel to Washington to meet Trump on July 8
  • Chile’s economy shrank at a record pace in May, unemployment rate rose to the highest since 2010 while retail sales and industry output slumped; the government extended quarantine measures for another week

    • BHP Group announced plans to scale back operations at one of its copper mines in Chile
    • Central bank opened a consultation to modernize currency regulation in the country
  • Peru moved forward with a four-phase reopening plan as President Martin Vizcarra said the virus spread continued to slow
  • Ecuador’s debt restructuring won’t guarantee sustainability of long-term debt, Fitch Ratings said
  • Venezuela opposition leader Juan Guaido should be recognized as the country’s interim president, a London judge ruled, delivering a blow to Nicolas Maduro’s attempt to retrieve $1 billion of gold in Bank of England vaults
  • Suriname is skidding toward default as the government asked creditors to delay payments on one of its bonds

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