Trade-War Fatigue? Emerging Markets Escape Worst of Risk Selloff
Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Paul Yeung/Bloomberg)

Trade-War Fatigue? Emerging Markets Escape Worst of Risk Selloff

(Bloomberg) -- Investors checking the price action in emerging markets early Monday might be forgiven for doing a double take. Despite all the negative weekend headlines, the MSCI stock index rose for a third day to reach its highest level in more than two weeks and currencies were mostly stronger. The won led the rally in the foreign-exchange stakes as hardening expectations that the Federal Reserve will cut rates by at least 50 basis points by year-end kept the dollar in check. Even Brent’s decline of more than 5% -- its sharpest retreat this year -- failed to hurt sentiment much, with the ruble pretty much unchanged at the time of writing. Note that Middle East markets were mostly closed for the Eid holiday.

Yuan’s Stability

One of the reasons underpinning the resilience may be the relative stability of the yuan. The Chinese currency was little changed at 6.906 per dollar and has failed to rise or fall by more than 0.2% since May 20. "Everyone’s looking at the onshore and offshore yuan and as long as it stays below 7, they don’t panic," Sebastian Galy, a senior macro strategist at Nordea Investment Funds in Luxembourg, said today.

No Mercy for Lira

The Turkish lira was an exception, weakening as much as 0.9% after data showed a greater-than-anticipated softening of inflation. With tumbling oil prices likely to compound expectations that price pressures will continue to ease in the months ahead, there may be worries that this will give the central bank a stronger excuse to cut rates in the months ahead, and perhaps too precipitously. Constantine Courcoulas, Bloomberg’s Istanbul-based editor, points out however, that with the Eid holiday imminent, the absence of many traders might be exacerbating the moves.

Peso ‘Long and Wrong’

Whatever might be said about Mexican President Andres Manuel Lopez Obrador’s conciliatory stance on his country’s standoff with the U.S. on trade, the peso is at serious risk of taking another leg lower. Though bullish bets on the currency dropped a touch in the week to May 28, overall long positions are still not far below their all-time high, CFTC data showed Friday. As ACLS Global’s chief strategist Marshall Gittler wrote in a note today, markets could well be "long and wrong."

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