EM Review: Relief Rally Halted as Fed Fails to Boost Risk Assets

(Bloomberg) -- A relief rally in emerging-market assets last week hit a roadblock as the U.S. Federal Reserve’s second rate cut this year wasn’t accompanied by a dovish tone that some traders were hoping for. The MSCI index of developing-nation equities posted the first weekly loss in five and a currency gauge also weakened. Some trade noise resurfaced by the end of the week as U.S. President Donald Trump said he won’t seek an interim agreement to end the trade war with China.

The following is a roundup of emerging-markets news and highlights for the week ending Sept. 22.

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

Highlights:

• U.S. Federal Reserve policy makers lowered the main interest rate for a second time this year and Chairman Jerome Powell said “moderate” policy moves should be sufficient to sustain the U.S. expansion
  • The Fed took action to calm money markets, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers
  • The New York Fed said Thursday that it will once again do a $75 billion overnight repo operation on Friday. It follows liquidity doses of the same size Thursday and Wednesday and $53.2 billion on Tuesday
• Bank Indonesia cut its benchmark interest rate to 5.25% from 5.5%, as expected, while monetary authorities in South Africa and Taiwan left their respective rates unchanged. Brazil’s central bank set the stage for a longer and deeper monetary easing cycle after cutting its key interest rate by half a percentage point to 5.5% and signaling inflation will remain below target next year even if borrowing costs fall further
• President Donald Trump said he doesn’t want to make a partial trade deal with China and that voters won’t punish him for the ongoing trade war in his 2020 bid for re-election
  • In a quick change of events, China canceled a planned visit to farms in the U.S. heartland -- a trip touted by the Trump administration as a building of “goodwill”
    • A change in schedule for a Chinese delegation’s planned visit to U.S. farm states has nothing to do with the trade talks, and America will extend the invitation in another arrangement, China Business News reports citing Vice Agriculture Minister Han Jun
  • Trade groups from China and the U.S. held “constructive” talks on relevant economic and trade issues of mutual concern in Washington during Sept. 19-20, China’s Ministry of Commerce said Saturday
  • Read more: U.S.-China Talks Resume as Beijing Officials Go to Farm Belt
• Saudi Arabia said attacks on its critical oil infrastructure were “unquestionably sponsored by Iran” but stopped short of saying the strikes were launched directly from or by the Islamic Republic, claims that could have propelled a drift toward war
  • President Donald Trump said he wants tougher U.S. sanctions on Iran as his top diplomat arrived in Saudi Arabia to consult with leaders and build a case against Tehran
  • Saudi Aramco’s chairman said the drone strike on the kingdom’s main crude-processing plant won’t slow preparations for an initial public offering of the state-owned oil giant
• China’s economy slowed further in August. Industrial output rose 4.4% from a year earlier, versus a median estimate of 5.2%, while retail sales expanded 7.5%, compared to a projected 7.9% increase
  • The new gauge of borrowing costs was lowered in September. The one-year reference rate for bank loans was set at 4.2% versus 4.25% in August
• North Korean leader Kim Jong Un invited Trump to visit Pyongyang, Joongang Ilbo reported, citing multiple people familiar with the matter
  • Trump said he “probably” won’t travel to Pyongyang for the next round of nuclear talks with Kim, but would be willing to visit the North Korean capital in the future

Asia:

• China’s overall prices are stable and the nation has a good foundation for prices to remain stabilized, said Fu Linghui, a spokesman for the National Bureau of Statistics
• The Bank of Korea should cut its base rate to the previous record low of 1.25% to help boost private-sector investment, one board member said, according to minutes of the Aug. 30 meeting that decided to freeze the rate at 1.5%
  • The central bank has “sufficient” room for more policy easing, board member Shin In-seok said
  • Fed’s decision to cut interest rates eases pressure on the South Korean central bank before the next interest-rate decision meeting, Bank of Korea Governor Lee Ju-yeol said
  • President Moon Jae-in’s approval rating reached the lowest since his term began in May 2017, Gallup Korea’s poll shows
• India’s central bank Governor Shaktikanta Das said he needs time to assess the impact of the oil supply shock following the attack in Saudi Arabia, adding that growth in the domestic economy remains a priority. He also said there’s room for interest-rate cuts to spur economic growth given stable and below-target inflation
  • Das said the RBI has no target or band for the level of the exchange rate and interventions are intended to manage undue volatility
  • India will cut corporate tax rate for local businesses to an effective 25.2% from 30%, Finance Minister Nirmala Sitharaman said Friday
  • India expects to rule over the entire state of Kashmir in the future, its foreign minister said, a statement that could further ratchet up tensions with rival Pakistan
• Thailand will reduce levies collected for its Oil Fund so that retail fuel prices remain unchanged as crude climbs, the Energy Ministry said
  • The nation can find other sources of oil imports if there’s a long-term impact from the attacks on Aramco facilities in Saudi Arabia, Energy Minister Sontirat Sontijirawong
  • Exports posted larger-than-expected drop in August while imports fell more than predicted, leaving trade surplus of $2.1 billion, compared with forecast $650 million in excess
• Philippines central bank Governor Benjamin Diokno said the central bank may cut its key interest rate by 25 basis points at the Sept. 26 meeting, with the increase in the consumer price index seen slowing to 1.4% in September compared to the previous year
  • The biggest risk to the world economy today is the U.S. president, Diokno told a panel discussion in Singapore
  • The attack in Saudi Arabia is unlikely to have an impact on Philippine oil supply, which means there will be no need for further government action, said Department of Finance Undersecretary Karl Kendrick Chua
• Malaysia’s tax collection rose 8.94% year-on-year as of Aug. 31 and an increase in tax collection shows that economy is growing substantially and is on an upwards trend, Finance Minister Lim Guan Eng said
  • Ruling party leader Anwar Ibrahim, who cut a deal to become the country’s next prime minister ahead of last year’s election, said he should take power around May 2020
  • Bank Negara Malaysia remains on guard against potential domestic and external risks to the nation’s financial stability including the weaker global outlook and elevated household debt, according to a statement from the central bank
• Terry Gou, the billionaire founder of Foxconn Technology Group, pulled out of next year’s presidential election in Taiwan, a move that may help unite the opposition Kuomintang party
  • The Solomon Islands broke diplomatic ties with Taipei in favor of Beijing
  • Taiwan decides to sever official relations with Kiribati, Taiwan Minister of Foreign Affairs Joseph Wu says; the break leaves Taiwan with just 15 diplomatic allies

EMEA:

• Attacks that slashed half of Saudi Arabia’s oil output had “zero” impact on the kingdom’s revenue and won’t affect economic growth, Finance Minister Mohammed Al-Jadaan said
  • The nation attempted to move beyond the worst oil disruption in its history, assuring the world that crude exports won’t suffer, its damaged facility has partially restarted and that production capacity will be back to normal within months
  • Saudi Arabia’s central bank said it’s prepared to inject liquidity in the financial system if needed to help the economy cope with the aftermath of the attacks
  • Saudi bonds declined and pressure on the riyal rose on Monday after drones struck at the heart of the kingdom’s biggest source of revenue
  • Iranian Foreign Minister Mohammad Javad Zarif refused to rule out military conflict in the Middle East after the U.S. sent more troops and weapons to Saudi Arabia in response to an attack on oil fields the U.S. has blamed on the Islamic Republic
• Prices on Aabar Investments PJS bonds jumped by the most on record as the state-owned Abu Dhabi firm offered to buy back 2 billion euros ($2.2 billion) of debt early
• The central banks of Saudi Arabia and the United Arab Emirates, the two biggest Gulf Arab economies, followed the Fed again on Wednesday after it reduced rates by a quarter percentage point
• Egypt’s stocks plummeted on Sept. 22 on concern that the small but rare protests against President Abdel-Fattah El-Sisi’s government may escalate
• Lebanese Prime Minister Saad Hariri is traveling to Saudi Arabia and France to follow up on efforts to secure financial support for his debt-laden country and show it’s serious about reform
• Benjamin Netanyahu’s gamble to hold elections for a second time this year backfired, as a deadlocked result left Israel convulsed by a new wave of political turmoil
• South Africa’s annual inflation rate rose more than forecast in August as food prices grew at the fastest pace in more than a year
• Nigeria’s inflation rate fell to the lowest in more than three years in August as growth in food prices slowed
• A Kenyan parliamentary committee rejected the National Treasury’s proposal to repeal a contentious law that caps interest rates, despite opposition from the central bank governor and the High Court annulling it
• Ghana’s economic growth slowed more than projected in the second quarter as the construction sector contracted
• Zambia, Africa’s second-biggest copper producer, may double power tariffs as the government seeks more costly imports to offset a shortfall from its drought-stricken hydropower dams
• Zimbabwe’s central bank has tightened the rules governing the trade of foreign currency by money exchange offices with immediate effect
• Ukraine’s former central bank governor, who purged the financial industry and helped bring the country’s biggest lender under state control, said her house near Kyiv was burned down in an arson attack
• Turkey took its boldest step yet to clean up the growing pile of bad debt held by banks. The Banking Regulation and Supervision Agency, or BDDK, told lenders for the first time to reclassify $8.1 billion of loans as non-performing by the end of the year and set aside enough provisions to cover them

Latin America

• Brazil’s pension reform rapporteur in the Senate said amendments accepted to the bill have no fiscal impact and will keep estimated savings of the overhaul unchanged. The first-round voting is set for Sept. 24 and second round Oct. 10
  • Petrobras raised fuel prices days after oil surged, a move that should help ease concerns about political interference at the firm
• Argentina’s government can’t resolve growing investor concern over the ability to repay its debt alone and will require consensus with the opposition to reach an orderly reprofiling of its obligations, Economy Minister Hernan Lacunza said
  • Central bank raised a floor on its benchmark interest rate to 78% from 58% for the rest of September as the government fights a resurgence in inflation triggered by political uncertainty
  • Argentina remained mired in a recession during the second quarter, its sixth straight, marking the longest quarterly recessionary stretch in at least the last 15 years, according to GDP data
  • An International Monetary Fund spokesman acknowledged the latest change to central bank policy, noting Economy Minister Hernan Lacunza’s upcoming visit to Washington
  • The central bank modified a capital control rule to allow sovereign bond payments to be made abroad, according to a resolution dated Sept. 16
• Uruguay’s second quarter GDP rose 0.1% compared to the same period of the previous year
• Colombia is seeking to take advantage of the rally in its long-term bonds to extend the average life of its debt, both in pesos and dollars

--With assistance from Colleen Goko, Selcuk Gokoluk, Alec D.B. McCabe, Carolina Wilson and Lilian Karunungan.

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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