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Risk Sentiment Worsens Amid Jitters Over China Stocks

Risk Sentiment Worsens Amid Jitters Over China Stocks

Emerging-market shares posted the biggest weekly loss in more than a month last week as signs that Chinese authorities are seeking to prevent an asset bubble and nervousness over U.S.-China tensions dragged down mainland equities. Developing-nation currencies were little changed over the week as the worsening sentiment was balanced by a weaker dollar. Losses in risk assets were tempered by signs of progress in developing a coronavirus vaccine.

The following is a roundup of emerging-market news and highlights for the week through July 19:

Click here for our emerging-markets weekly preview, and listen here to our weekly podcast.

Highlights:

  • The Trump administration rejected China’s expansive maritime claims in the South China Sea, reversing a previous policy of not taking sides in such disputes and escalating tensions with Beijing on yet another front
    • President Trump ordered an end to Hong Kong’s special status with the U.S. and signed legislation that would sanction Chinese officials responsible for cracking down on political dissent in the city. At the same time, he has decided against moving to undermine the Hong Kong dollar’s peg to the greenback, people familiar said
    • Trump has indicated to aides that he doesn’t want to further escalate tensions with Beijing, and has ruled out additional sanctions on top officials for now, according to people familiar
  • Huawei Technologies Co. will be banned from the U.K.’s next-generation mobile networks, in a crackdown on the Chinese company that will delay 5G roll-out. China called the ban “disappointing and wrong
    • U.S. Secretary of State Michael Pompeo said the nation will impose visa restrictions on some employees of Huawei over the Chinese Communist Party’s human rights abuses
  • China announced sanctions against U.S. officials including Senators Marco Rubio and Ted Cruz, in an attempt to retaliate over Washington’s moves to punish Beijing for its treatment of ethnic minorities in Xinjiang
    • China will impose unspecified sanctions on defense contractor Lockheed Martin Corp. after the U.S. approved a possible $620 million deal to supply missile parts to Taiwan
  • China’s economy returned to growth in the second quarter, marking an important step in the global struggle to climb out of the coronavirus slump. Retail sales shrank 1.8%, weaker than a projected 0.5% increase
  • A rally in Chinese shares is unraveling almost as quickly as it began, with losses accelerating after state media criticized one of the country’s most popular stocks
    • Kweichow Moutai fell the most in nearly two years after the People’s Daily took aim at the high price of the liquor it makes. The plunge reverberated across China’s almost $10 trillion stock market
  • Moderna Inc.’s Covid-19 vaccine produced antibodies to the coronavirus in all patients tested in an initial safety trial, federal researchers said, clearing an important milestone as the U.S. grapples with a surge in infections
  • European Union efforts to agree on a 750 billion-euro ($856 billion) stimulus package ran into trouble late Sunday as leaders were unable to reconcile differences over how much of the recovery fund should be distributed through grants versus low-interest loans
  • European Central Bank President Christine Lagarde said she won’t let monetary policy be constrained as she fights to support the euro area’s economic recovery from the coronavirus crisis
  • Bank Indonesia lowered interest rates for a second month to bolster economic growth, and signaled further easing will depend on inflation and how the recovery from the coronavirus unfolds
  • Russia’s central bank has room to cut interest rates this month as inflation remains well below target, Governor Elvira Nabiullina said
  • Poland’s governing party beat back the biggest threat to its nationalist transformation during its half-decade rule, with incumbent Andrzej Duda narrowly winning a presidential election
  • The Group of 20 leading economies will decide on extending the current debt payments suspension for the poorest countries closer to the end of the year, putting off assurances of additional relief as the coronavirus pandemic ravages the world
  • Chile’s lower house approved an opposition-backed bill allowing citizens to tap part of their pension savings amid the coronavirus outbreak
Asset MovesWeekly
MSCI EM stocks index-1.3%
MSCI EM FX index-0.01%
Bloomberg Barclays global EM local currency bond index+0.3%

Asia:

  • China’s exports and imports both rose in June, signaling that demand at home and abroad may have started to recover even as the pandemic ravages the global economy
    • Chinese commercial banks issued a record first-half amount of bond-like securities backed by soured loans this year, as a virus-induced economic slowdown brought on a fresh wave of financial stress
    • A sell-off in Chinese domestic corporate bonds has intensified, pushing risk premiums over government debt to a two-year high as more money leaves for the country’s stock market
    • President Xi Jinping pledged to provide a better business environment for foreign firms, even as Chinese companies come under increased scrutiny abroad
    • Chinese firms are taking advantage of strong investor demand in the dollar bond market to sell debt as new issuance collapses onshore
    • China plans to sell yuan-denominated government bonds in Hong Kong on July 23, a move that could help Beijing promote the currency’s usage among offshore investors
  • South Korea more than doubled its spending plan for President Moon’s “New Deal” program to 160 trillion won ($133 billion), underscoring its ambition to recover from the pandemic by reshaping the economy around technology
    • Bank of Korea Governor Lee Ju-yeol said helping the virus-hit economy took precedence over property market concerns after keeping interest rates at a record low
    • South Korea’s jobless rate unexpectedly fell in June, but remained well above levels before the pandemic struck
    • South Korea has set the smallest increase in its minimum wage on record as the government struggles to ease the burden on small businesses and stimulate an economy reeling from the coronavirus
  • India’s trade balance returned to a surplus in June after 18 years, as imports slid more than exports

    • A balancing act awaits India’s central bank as it tries to build foreign-exchange reserves and support the bond market
    • India’s retail inflation unexpectedly quickened in June, signaling price pressures in an economy that’s exiting a nationwide lockdown
    • A brutal day of hand-to-hand combat on the India-China border last month may accomplish what years of Pentagon and White House outreach has struggled to achieve: draw the U.S. and India closer militarily
    • The European Union and India have agreed to increase naval cooperation and security consultations amid growing tensions between China and its maritime neighbors
  • Indonesian President Joko Widodo wants to ramp up coronavirus testing by 50% to 30,000 per day as infections reached nearly 77,000
    • Jakarta will remain under some social distancing rules for two more weeks after coronavirus cases surged following the easing of a partial lockdown a month ago
  • Thailand’s finance minister resigned along with three other Cabinet members in a shakeup of the government’s economic team during the nation’s worst crisis in decades

    • Bank of Thailand said it will preserve the remaining policy space from the current record low of 0.5% to prepare for a “worst-case scenario”
  • Malaysian Prime Minister Muhyiddin Yassin’s narrow win in a key parliamentary vote showed the prospect of snap elections still remains a risk

    • One of the world’s busiest border crossings is slowly reopening. Singapore and Malaysia will implement a reciprocal green lane for travel across their border, which some 300,000 people traverse by land each day
    • Malaysia’s Securities Commission said the recent surge in retail investors is a boon for the country’s stock market and doesn’t pose a risk
  • Philippine President Rodrigo Duterte has put his public approval to the test after the closure in the middle of the coronavirus pandemic of the nation’s largest broadcaster, a producer of newscasts and romantic soap operas that as many as three out of four Filipinos wanted to stay on the air

  • Taiwan will strengthen management of Hong Kong and Macau funds with links to China to protect national security and rights of its citizens
    • Taiwan’s top representative to Hong Kong returned home after refusing to sign a statement supporting the “one China” principle, the news site Up Media reported, in another example of the city’s tighter enforcement of Beijing’s policies

EMEA:

  • Turkey’s market regulator fined seven brokerages for violating short-selling rules and imposed a six-month trading ban on individuals it suspects of stock-price manipulation through social-media platforms
    • Turkish President Recep Tayyip Erdogan achieved his goal of converting the Hagia Sophia into a mosque, ignoring international calls to keep it as a museum and stamping his Islamist-rooted politics on the Istanbul skyline
    • The Turkish central bank’s former chief economist said the country’s interest rates should go no lower for now after a months-long easing cycle drove inflation-adjusted borrowing costs deep below zero
    • Turkey said it’s raising the amount of foreign exchange lenders must hold at the central bank, a move that’s expected to increase the nation’s reserves by around $9.2 billion
  • The head of Ukraine’s fourth-biggest lender was named to lead the central bank -- an appointment that could decide the fate of billions of dollars in foreign aid
  • Russian President Vladimir Putin agreed to push back completion of a $400 billion investment and development program, blaming the economic havoc wreaked by the coronavirus
  • European Central Bank says it set up repo line arrangements with the central banks of Serbia and Albania to provide euro liquidity to financial institutions in those countries
  • Hungary Prime Minister Viktor Orban said other European Union leaders had rejected his proposal to speed up an ongoing rule of law procedure against Hungary, complicating talks to secure a deal on the bloc’s emergency pandemic funding
  • Investors scooped up the Czech Republic’s first euro-denominated bonds this year, showing confidence in the government’s plan to fuel an economic recovery with an unprecedented borrowing spree
  • Azerbaijan reported the combat death of its most senior military officer in nearly 30 years as border clashes with Armenia escalated in a third day of fighting
  • Economies in the Middle East and North Africa are expected to contract further this year than initially estimated, according to the International Monetary Fund
  • Saudi Arabia’s stock exchange expects share sales to pick up after coming to a halt during the early stages of the coronavirus pandemic

    • The stimulus-driven “everything rally” has sidestepped Saudi Arabian stocks. The equity market is underperforming its emerging-market peers by a factor of one to seven as investors fret over the oil-dependent kingdom’s growth outlook
    • Saudi Arabia has removed two million people from an assistance program meant to soften the blow of its economic overhaul, stirring frustration among some during the worst downturn in decades
  • Lebanon is in contact with Kuwait, Qatar and Iraq to help the country tackle its worst financial crisis in decades, Prime Minister Hassan Diab said
  • The filling of a reservoir behind a mega-dam Ethiopia is building on the Nile River, whether by nature or government action, is elevating tensions with Egypt and Sudan
    • Egypt took another step toward further opening up its local debt to foreigners and reviving a market that’s been a favorite with investors. Lawmakers approved a new central security depository last week, a major requirement for allowing Egypt’s bonds and bills to be settled by Euroclear Bank SA
  • South Africa’s inflation rate dropped to 2.1% in May, below the central bank’s target band for the first time since 2005
    • South African Airways’ creditors and unions approved a rescue plan that includes at least 26.7 billion rand ($1.6 billion) in state funding and thousands of job losses
  • Ghana’s inflation rate remained above the central bank’s target range for a third month in June, even as it decreased marginally
  • Tunisian Prime Minister Elyes Fakhfakh resigned, in a move aimed at heading off a political crisis in the North African nation
  • Zimbabwe’s government may allow trade on the Zimbabwe Stock Exchange to resume as early as this week, according to people familiar
    • Zimbabwe’s police have accused Econet Wireless Ltd., the country’s dominant mobile phone company, of money laundering, demanded a list of its subscribers and issued a search warrant against it

Latin America:

  • Brazil’s economy expanded less than forecast in May, according to a key measure of activity

    • The Economy Ministry is expected to deliver a tax reform proposal after Lower House President Rodrigo Maia urged lawmakers to resume discussions
    • Economy Minister Paulo Guedes said the government should discuss a tax on financial transactions
  • Chile’s President Sebastian Pinera pledged a “profound reform” of the country’s emblematic private pension system and more aid for the middle classes as he seeks to win back control of congress

    • The central bank kept borrowing costs unchanged at a record low of 0.5% for a third meeting
  • Investors swapped $5 billion of local Argentine dollar debt for inflation-linked peso bonds Friday, as the government seeks to convert its foreign currency obligations in the local debt market to pesos

    • Argentina’s inflation accelerated more than expected in June, a surprising result given that millions of citizens are stuck at home under an extended Covid-19 quarantine
    • Government submitted a bill that gives the Economy Ministry authority to lead a swap for local-law debt
  • Mexican legislators allegedly took bribes to vote in favor of a landmark energy reform bill during the previous administration, President Andres Manuel Lopez Obrador said

    • Pemex said 202 employees and five contractors have died of coronavirus, more than in any other company in the world, according to data reviewed by Bloomberg
    • Federal workers are being asked to chip in a percentage of their salary to help the government’s finances
  • Colombia is reaching “worrying” debt limits, Finance Minister Alberto Carrasquilla said
    • Colombia’s economy contracted at a slower pace in May as the government allowed more businesses to reopen following one of the strictest lockdowns in the Americas
  • Ecuador’s Finance Minister said the country has reached an agreement with China to reschedule its debt payments

    • Some bondholder groups responded to the country’s debt restructuring proposal with revised terms
  • Suriname was upgraded to CC from default by Fitch Ratings after the nation won the approval of bondholders to reschedule payments on notes maturing in 2023
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