EM Review: Recession Fears Outweighed Delay in Some U.S. Tariffs

(Bloomberg) -- Emerging-market currencies and stocks fell for a fourth straight week last week, the longest losing streak for equities since October, amid mounting concern about a global slowdown. The inversion of the U.S. yield curve for the first time since 2007 fueled fears of a recession, outweighing relief over a pause in the U.S.-China trade war. Argentina led declines after market-friendly President Mauricio Macri was trounced in a primary election.

The following is a roundup of emerging-markets news and highlights for the week ending Aug. 18.

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

Highlights:

• On Wednesday, 10-year Treasury yields fell below the rate on 2-year notes for the first time since 2007. The yield-curve inversion sent ripples through financial markets amid concerns over a possible recession in the U.S.
• President Donald Trump delayed the imposition of new tariffs on a wide variety of Chinese consumer products including toys and laptops until December. The pause in his fight with China came as senior officials on both sides had their first phone conversation since Trump threatened the tariffs at the beginning of this month
  • Trump said Thursday he had a call coming soon with China’s President Xi Jinping
  • China called planned U.S. tariffs on an additional $300 billion of Chinese goods a violation of accords reached by the presidents, vowing retaliation as Beijing also pushed back on Trump’s efforts to link the trade war with the turmoil in Hong Kong
  • Chinese officials are sticking to their plan to visit Washington in September for face-to-face trade meetings, people familiar with the matter said
• China posted the weakest industrial output growth since 2002 in July, as a cyclical slowdown and trade tensions add to the case to roll out more stimulus
  • The People’s Bank of China has responded to downward pressure on the renminbi exchange rate by communicating with the media and market participants to keep the rate “basically stable,” Deputy Governor Liu Guoqiang writes in a Financial Times opinion piece
  • Yuan won’t see disorderly weakening despite external shocks, including trade frictions, according to an article written by PBOC Deputy Governor Pan Gongsheng
  • China’s central bank said it’ll start releasing a new reference rate for bank loans
• Argentine Economy Minister Nicolas Dujovne resigned Aug. 17, a day after Fitch Ratings cut Argentina’s long-term issuer rating by three notches to CCC and S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on it
  • Macri will meet new designated economy minister Hernan Lacunza and central bank President Guido Sandleris, according to a spokesman from the presidential palace
  • Stocks, bonds and the currency all sold off ahead of the downgrade amid the prospect of market friendly Mauricio Macri losing power in October’s presidential election
  • Assets rebounded Thursday after a brutal three-day sell-off
  • The rout, that took sovereign bonds and the currency to a record low, hit big funds, including Pimco and star bond manager Michael Hasenstab
• Hong Kong’s airport halted check-ins for remaining departures for a second straight day on Tuesday as embattled local leader Carrie Lam warned that the city risked sliding into an “abyss”
  • Investors are getting anxious about the impact of 10 weeks of anti-government demonstrations on Hong Kong’s banks
  • China ramped up the rhetoric against the protesters, with mainland officials in the city saying they “acted like terrorists” in swarming the main terminal buildings
• Brazil’s central bank announced it will sell dollars from its foreign reserves for the first time in more than a decade to meet spot-market demand
  • Central bank will also offer reverse currency swaps -- the equivalent of buying dollars in the futures market -- to cancel out the impact selling dollars would have had on the real
  • Plan was welcomed by traders who say the move will help meet market demand without disrupting the outlook for the currency
• The Moscow City Court released French investor Philippe Delpal from jail to house arrest after prosecutors unexpectedly dropped their opposition in a closely watched case that’s become a thorn in relations between Russia and France

Asia:

• The People’s Bank of China is “close” to issuing its own cryptocurrency, according to a senior official
• South Korea moved to downgrade Japan from its list of most trusted trading partners while also seeking talks to end a months-long spat that has hurt economic ties between the two American allies
  • South Korea is not considering curbs on DRAM supply to Japan as part of corresponding measures against Japan’s export restrictions, President Moon Jae-in’s spokeswoman Ko Min-jung said
• Bank Indonesia said there is still space for a policy rate cut, while the economy continues to perform well despite strong external headwinds
  • Indonesia’s economy is set to expand at the fastest pace in seven years in 2020 with growth of 5.3%, President Joko Widodo said Friday in his annual budget speech
  • Widodo sought parliament’s approval to relocate the nation’s capital to the island of Borneo, home to some of the world’s biggest coal reserves and orangutan habitats, as he seeks to ease pressure on congested and polluted Jakarta
  • Widodo said laws hindering the nation’s progress must be scrapped to boost economic growth, signaling his intention to push on with an ambitious nation-building agenda in his second term
  • President proposed record government spending next year to drive the economy to its quickest projected growth in seven years
• Thai Industry Minister Suriya Juangroongruangkit said he is satisfied with the Bank of Thailand’s currency management and that the baht strength reflects a high current-account surplus. He also said the central bank can’t intervene much as Thailand could then be criticized for being a currency manipulator
  • Prime Minister Prayuth Chan-Ocha wants the baht to be at the level that the country’s exports can compete, Narumon Pinyosinwat, the government’s spokeswoman, said
  • Bank of Thailand Governor Veerathai Santiprabhob said a planned policy-coordination committee with the Ministry of Finance won’t affect the central bank’s rate decisions
  • Thailand plans a 316-billion-baht ($10 billion) package of government spending and loans to counter an economic slowdown caused by the U.S.-China trade war and currency strength
• India Prime Minister Narendra Modi has hit back at critics of his government’s decision to revoke Kashmir’s autonomy, saying its special status had only led to terrorism and corruption
  • He also announced a new position of Chief of Defence Staff, saying the move will “sharpen coordination” between the army, navy and air force services
  • India’s consumer prices rose 3.15% in July compared with 3.18% in June, while wholesale-price gains slowed more-than-expected to 1.1% from 2% the prior month
• Further reduction in Philippines lenders’ reserve requirement ratio is a live discussion in Monetary Board, central bank Deputy Governor Francis Dakila told ABS-CBN News Channel
  • Foreign direct investments net inflow was at $242 million in May, down 85.1% from last year
• Malaysia’s economic growth quickened in the second quarter, spurred by stronger domestic demand and a rebound in commodity prices; gross domestic product expanded better-than-expected 4.9% in the second quarter from a year ago, the strongest expansion since early last year
  • The central bank announced further steps to increase market liquidity, ahead of an expected decision by FTSE Russell in September on whether to retain ringgit bonds in its index
  • Inflation slowed to 1.4% in July on year from 1.5% in June
• The European Union opened a probe into whether Chinese, Taiwanese and Indonesian exporters of flat-rolled stainless steel sell it in Europe below cost
• Taiwan Premier Su Tseng-chang asked central bank governor Yang Chin-long to closely monitor global financial markets amid China-U.S. trade conflict and uncertainties surrounding Hong Kong
  • Taiwan plans to spend a record amount on national defense next year as President Tsai Ing-wen looks to bolster the island’s defenses in the face of threats from an increasingly assertive China

EMEA:

• Russia’s economy expanded 0.9% in the second quarter as consumer demand remained weak, but mining and manufacturing showed a modest pickup. The Economy Ministry said the pace will accelerate in the second half of the year
  • Russia’s credit score at Fitch Ratings is back to where it was before the crisis in Ukraine almost half a decade ago, but uncertainty over U.S. penalties still stifles the nation’s ranking
• The European Union’s eastern economies downshifted last quarter along with the rest of the bloc, but a job boom and stimulus helped them withstand the brunt of global headwinds that sent the U.K. and Germany into contraction
  • Ukraine’s economic growth unexpectedly accelerated to the fastest pace since 2016, helped by a strong grain harvest and domestic consumption
• The Turkish government plugged its deteriorating finances in July with an outsized cash infusion from the central bank. The monetary authority transferred around 22 billion liras ($3.9 billion) to the Treasury last month, the biggest deposit since an annual dividend payment in January, according to data on its website
• South Africa’s rand was back as the world’s most-volatile major currency on Thursday, with options pricing suggesting it’s not going to lose that status any time soon
  • Retail sales rose for the sixth straight month in June
• Mozambique’s central bank cut its key rate for a second time this year as the inflation outlook improved following a new peace deal. The Monetary Policy Committee reduced the benchmark interbank rate to 12.75% from 13.25%, Banco de Mocambique said Thursday

Latin America:

• Argentina’s presidential front-runner Alberto Fernandez criticized Macri for increasing short-term debt to unsustainable levels, although he said he doesn’t want to default on the country’s obligations
  • Macri tweeted Wednesday that he had a long phone conversation with Fernandez, who committed to collaborate so that political uncertainty affects the economy as little as possible
  • The drastic change in the political outlook had analysts and traders scrambling to re-calculate the fair value for Argentine assets. Bank of America Merrill Lynch calculated the recovery value for the sovereign bonds at around 40 cents on the dollar in case of a restructuring in 2020
  • Macri announced measures to support the economy, including freezing fuel prices for 90 days, increasing the minimum salary and modifying taxes paid by workers
  • Investors now focusing on incoming T-bills rollovers, as government may struggle to find demand for new notes
  • Argentine savers pulled more than $700 million from their dollar-denominated accounts on Monday and Tuesday
• Brazil’s economy likely fell into recession in the second quarter according to a key gauge of economic activity
  • The lower house of Congress approved the base text of a measure aimed at reducing bureaucracy and restrict the regulatory power of the state. Speaker Rodrigo Maia said the tax reform can be approved by the end of the year
  • Brazil will leave the South American trade bloc Mercosur if conflicts arise with the winner of Argentina’s election, President Jair Bolsonaro said
• Mexico’s central bank reduced borrowing costs for the first time in five years after inflation slowed, the economy faltered and the U.S. cut its own rate
  • President Andres Manuel Lopez Obrador wants to upgrade ports and refineries to help trigger growth at the Isthmus region
  • Lower revenue will drive a wider-than-anticipated fiscal deficit this year, despite underspending, according to Moody’s Investors Service
  • Pemex’s business plan is expected to weaken its credit metrics, Fitch said
  • Lopez Obrador ratcheted up his attacks against credit-rating companies on Friday, saying he hopes they act more objectively and noting that Mexico pays them as much as $300 million a year
  • A Mexican judge ordered the detention of a former cabinet minister facing corruption charges
• Colombia’s economy grew more than expected in the second quarter, as the retail, wholesale and transport sector expanded along with the financial industry
• Peru economic activity exceeded expectations in June
  • Central bank increased currency intervention, selling three times more foreign currency swaps than in previous time

--With assistance from Julia Leite, Yumi Teso, Alex Nicholson and Philip Sanders.

To contact Bloomberg News staff for this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Selcuk Gokoluk in London at sgokoluk@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net

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

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