EM Review: Ranks of Rate Cutters Swell With Fed Bets on the Rise

(Bloomberg) -- Emerging-market currencies and stocks advanced last week as dovish comments by Federal Reserve members improved the outlook for riskier assets. Traders boosted bets that U.S. could reduce rates by as much as half a percentage point this month, while South Korea, South Africa and Indonesia all added to the global easing cycle, lowering rates as growth falters.

The following is a roundup of emerging-markets news and highlights for the week ending July 19.

Highlights:

• President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants
  • Trump complained again that China wasn’t buying the large volumes of U.S. agricultural goods that he claims Xi Jinping promised to purchase
• Two senior Federal Reserve officials stressed the need to act quickly if the U.S. economy looked likely to stumble, reinforcing bets the central bank could cut interest rates by as much as half a percentage point later this month
  • U.S. money markets priced in 41 basis points of easing in July after the two men spoke
  • St. Louis Fed chief James Bullard said he favors a 25 bps rate cut this month
• Treasury Secretary Steven Mnuchin said he and U.S. Trade Representative Robert Lighthizer may travel to Beijing for trade negotiations if talks by phone are productive
• China’s economy posted the weakest growth since quarterly data began in 1992 amid the ongoing trade standoff with the U.S., while monthly indicators provided signs that a stabilization is emerging. Gross domestic product rose 6.2.% in the April-June period from a year earlier
  • In June, factory output and retail sales growth beat estimates, while investment in the first half of the year also gave further evidence that stimulus measures are paying off
• South Korea’s central bank unexpectedly trimmed its benchmark interest rate by 25 basis points to 1.75%, while Indonesia cut its rate by the same margin to 5.75% as predicted. South Africa cut the repurchase rate to 6.5% and Ukraine lowered borrowing costs to 17%, both as expected
• Chile’s central bank, meanwhile, left the policy rate unchanged at 2.5%, while opening the door to further reductions
• Turkey’s new central bank governor ended days of silence since his surprise appointment by President Recep Tayyip Erdogan with a message that hinted at restraint as he pivots toward interest-rate cuts
  • Trump said he’s not looking at economic sanctions against Turkey “right now”
• Iran’s Revolutionary Guard Corps seized a British oil tanker in the Strait of Hormuz amid soaring tensions in one of the world’s critical energy choke-points.
  • Trump said the U.S. “immediately destroyed” an Iranian drone that approached the USS Boxer near the Straits, though officials in Tehran denied losing one
  • Iran is capable of shutting the Straits, but doesn’t want to do it, the country’s foreign minister said
  • Iran’s Revolutionary Guard seized a foreign vessel smuggling fuel in the Persian Gulf on July 14
  • At least two Iranian vessels set to carry Brazilian corn were stranded off the Latin American nation’s coast because the state-controlled oil company Petroleo Brasileiro SA said it won’t fuel the ships due to the risk of U.S. sanctions

Asia:

• The Chinese yuan is being given a new opportunity to boost its global status amid rising trade conflicts, according to People’s Bank of China Deputy Governor Pan Gongsheng
  • Sentiment in China’s foreign-exchange market is more rational and stable than last year despite an escalation in trade dispute between China and U.S. in May, said Wang Chunying, spokeswoman of State Administration of Foreign Exchange
• South Korean President Moon Jae-in warned Japan that any effort to block his nation’s economic growth “will not succeed”
  • Japanese Economy Minister Hiroshige Seko said his ministry will respond at an official level to any questions with South Korea on export controls and he doesn’t see a quick resumption of policy talks with Japan’s neighbor
  • South Korean Prime Minister Lee Nak-yon said diplomatic discussions are underway and he expects to see some results, when asked about possibility of sending a special envoy to Japan, DongA Ilbo newspaper reported
  • Japanese Foreign Minister Taro Kono said South Korea is responsible for worsening the relationship between the two nations by refusing to accept arbitration over forced-labor cases
  • Bank of Korea cut 2019 GDP growth forecast to 2.2% from 2.5%
• India’s trade deficit narrowed in June as a slowing economy and lower oil prices curbed imports
• Bank Indonesia sees more room for accommodative policy, Governor Perry Warjiyo said after the rate decision
  • The nation’s exports fell 8.98% in June from last year, while trade surplus came in at $196 million, versus estimated $658 million
• Malaysia and Indonesia are reviewing their relationship with the EU and member states and are committed to challenging the bloc’s biofuel law through World Trade Organization and other avenues, Council of Palm Oil Producing Countries said
• The Bank of Thailand reiterated its concern about the baht’s persistent strength on Wednesday, but said cutting the key interest rate may have only a limited impact and instead flagged a preference for using a range of tools
  • The central bank plans to ease rules on money outflows by giving more flexibility for portfolio investment by Thai investors, according to Deputy Governor Mathee Supapongse
  • The country’s tourism minister has blamed a surge in the baht for sapping tourist arrivals and said he’ll take up the matter with the central bank
  • Prime Minister Prayuth Chan-Ocha and his new cabinet were sworn into their roles by King Maha Vajiralongkorn on Tuesday. The new government plans to announce key policies to parliament on July 25, Prayuth said
  • Thailand’s outlook was revised to positive from stable on increasing confidence that lingering political risks won’t derail macroeconomic management, Fitch Ratings said
• Malaysia’s finance minister said the 2020 budget will take into account risk scenarios caused by the continuing U.S.-China trade war even as the nation’s economy shows signs of resilience
• Kaohsiung mayor Han Kuo-yu won Kuomintang primary in a bid to contest January’s election for Taiwan presidency
  • Chinese state media raised the specter of a backlash against U.S. companies including General Dynamics Corp. and Honeywell International Inc, as the foreign ministry warned firms would be sanctioned if a potential $2 billion arms sale to Taiwan goes ahead
  • Honeywell has no input in these arms agreements and has no direct dealings with Taiwan, the U.S. company said
• Bangko Sentral ng Pilpinas’s survey of economists before June rate-setting meeting showed average inflation forecasts of 2.9% and 3.1% for this year and next, according to minutes of the policy meeting
  • Philippines revised foreign-exchange assumption to 51-53 pesos a dollar for 2019 and 51-55 from 2020 through 2022, compared with 52-55 assumptions affirmed for those years earlier this year

EMEA:

• Trump confirmed that Turkey won’t be able to buy the U.S. F-35 fighter that it helps build after the country began taking delivery last week of a Russian missile defense system
• The Kremlin raised the possibility of changing Russia’s Constitution after a top lawmaker proposed bolstering parliament’s powers, in a move that could help to extend President Vladimir Putin’s rule
  • The U.S. House adopted an amendment to the National Defense Authorization Act that would sanction Russian sovereign debt
• South Africa’s anti-graft ombudsman ruled that President Cyril Ramaphosa violated the constitution and executive ethics code when he misled lawmakers about a campaign donation
• First Abu Dhabi Bank PJSC’s board proposed removing the foreign ownership limit after the United Arab Emirates started loosening rules to attract international investors
• South Africa’s anti-graft ombudsman ruled that President Cyril Ramaphosa violated the constitution and executive ethics code when he misled lawmakers about a campaign donation from a company implicated in paying bribes to senior government officials
• Foreign holdings in Egyptian Treasury bills and bonds climbed to $19 billion in June
• A delegation of three former Lebanese premiers asked Saudi Arabia for financial assistance to help shore up their country’s deteriorating finances
  • Lebanon’s parliament passed an overdue, deficit-cutting 2019 budget as it tries to overcome the skepticism of critics, unlock critical funding, and restore investor confidence. The nation needs to show that it can implement fiscal and structural reforms to unlock some $11 billion in grants and loans from the international community
• Zambian dollar bonds soared as Bwalya Ng’andu was sworn in as the nation’s new finance minister, a day after Margaret Mwanakatwe was fired from the post
  • Ng’andu said he wants to restart discussions with the IMF about a bailout loan and that the government may delay the start of a controversial sales tax
• Zimbabwe has gone from deflation to triple-digit inflation in less than three years
• Sudan’s military council signed a power-sharing deal with the country’s firebrand opposition that seeks to stem months of uncertainty and sporadic bloodshed after the overthrow of long-time President Omar al-Bashir
• Ghana’s central bank kept its benchmark interest rate unchanged at 16% for a third straight meeting even as inflation slowed to a five-month low

Latin America:

• Argentine consumer prices rose 55.8% in June from a year earlier and 2.7% from May, largely in line with economist estimates
  • Central bank forecasts peso volatility to be moderate in the run-up to October’s election
  • The IMF granted Argentina approval to boost currency-market interventions to contain a potential selloff in the peso before the election
  • IMF also changed its 2019 GDP forecast for Argentina to -1.3% from -1.2%
  • An election poll showed President Mauricio Macri is behind opposition candidate Alberto Fernandez in voter intention
• Mexico would have to increase financial support to Pemex significantly for the national oil company to increase capital-investment levels needed to fully replace its reserves, Moody’s said
  • Pemex announced plans to balance its budget by 2021 and reverse a decade and half of declining crude production as early as next year
  • Former Mexican Finance Minister Carlos Urzua said a disagreement over the state power company’s fight to hold up natural gas pipelines helped trigger his July 9 resignation
• Brazil’s Economy Minister Paulo Guedes is said to be presenting two proposals to President Jair Bolsonaro to allow withdrawals from the FGTS workers’ savings fund, a measure that aims too boost consumption
  • Bolsonaro said the government will change federal levies through a tax reform bill
  • Savings from Brazil’s pension bill could increase by 350 billion reais over a decade if the Senate includes states and municipalities back into the reform, Guedes said
  • Brazil economists have slashed their 2019 growth forecasts every week for the past five months, underscoring a year of dashed hopes for a faster recovery
  • May economic activity index rose 0.54% in May from previous month
• Peru’s ex-president Alejandro Toledo, wanted in his home country on corruption charges, was arrested in the U.S. on an extradition warrant, authorities said

--With assistance from Philip Sanders and Alex Nicholson.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net;Selcuk Gokoluk in London at sgokoluk@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, Robert Brand

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