Emerging-Market Gains at Mercy of Fed as Trade Talks Simmer On

(Bloomberg) -- In any other week, the prospect of a major emerging-market central bank cutting interest rates to an unprecedented low would dominate the agenda.

But the likelihood that Brazil will reduce its target rate to a record this week is merely a sub-plot in the story of falling global borrowing costs highlighted by the Federal Reserve’s much-anticipated decision Wednesday, when U.S. policy makers may not only cut their key rate for the first time in more than a decade, but also give clues to what’s in store for the rest of the year. While the meeting may determine the fate of many developing economies for the coming months, much may also depend on the outcome of fresh talks between the U.S. and China, as investors continue to assess the impact of the yearlong trade war.

Though emerging-market dollar bonds have advanced since May on the expectation that the Fed will cut rates, the premium they offer is still wider than in early 2018 and most of 2017.

Policy makers will need to “to walk a fine line to keep the Goldilocks scenario going,” said Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital Ltd. “If the Fed is too downbeat on growth, U.S. Treasuries will rally, but spreads might sell off. But if they are hawkish at all, Treasuries will sell and spreads will widen too. Chances are the Fed will deliver for now, and the rally keep going” for the next few months.

• Listen here to the emerging markets weekly podcast.

Let’s Talk

• Markets will be looking for reasons to cheer when the U.S. and China restart trade negotiations in Shanghai on Tuesday. The sides remain at odds over issues such as Washington’s demands for structural reforms to China’s economy and Beijing’s call for the U.S. to remove punitive tariffs on imported Chinese goods
• President Donald Trump said Friday China may wait until after the 2020 U.S. presidential election to sign a trade agreement because Beijing would prefer to reach a deal with a Democrat
• “Trade talks will continue to fade in the background,” said Nader Naeimi, the head of dynamic markets at AMP Capital in Sydney. “There will be some noise and declaration of a win by Trump, but both sides will now want stability.”
  • Naeimi is keeping his holdings in emerging-market bonds and remains bullish on developing-nation currencies, with carry still attractive

Brazil Easing

• Brazil’s central bank is expected to kick off an easing cycle on Wednesday with an interest rate cut of at least 25 basis points as the economy sputters
• Investors will watch unemployment and production data for clues on whether Latin America’s largest economy slipped into a recession during the second quarter. The real outperformed all regional peers during the past month

Turkey Explanation

• Turkey’s new central bank governor, Murat Uysal, will unveil his first quarterly inflation report. Investors will be looking out for an explanation for the bank’s biggest interest-rate cut in at least 17 years on Thursday as well as updates to its inflation forecast for end-2019
• The lira strengthened on Friday, even as President Recep Tayyip Erdogan called on the central bank to press ahead with monetary easing

Economic Data

• A slew of manufacturing gauges data are due this week, starting with China on Wednesday, which will give an indication of the state of the global economy after the International Monetary Fund last week downgraded its growth outlook. Markit will release PMI data for South Korea, Taiwan, Malaysia, Thailand, the Philippines, Indonesia and India on Thursday
• Taiwan, which relies heavily on exports, will report its preliminary second-quarter GDP data on Wednesday. The economy probably grew 1.8% in the second quarter from a year earlier, the median estimate in a Bloomberg survey of economists show. That compares with a 1.71% increase in the first quarter
• Like South Korea, the electronics slump has been hurting Taiwan and the GDP data is at risk of a downside surprise, according to Prakash Sakpal, an economist in Singapore at ING Groep NV
  • Taiwan’s dollar is the worst performer in emerging Asia this year after the South Korean won
• South Korea will release full-month trade figures for July on Thursday. Thailand releases trade statistics for June on Wednesday and Malaysia unveils similar data on Friday
• Inflation figures are on the agenda for South Korea, Thailand and Indonesia on Thursday
• Mexico’s preliminary second-quarter gross domestic product data, due on Wednesday, could also show the nation fell into recession
• Chilean unemployment and industrial production data for June, to be released the same day, will probably show declines. Chile’s peso is the region’s biggest laggard so far this quarter
• Argentine wage growth data, also set for Wednesday release, could show they rose faster than inflation for the first time since the end of 2017. Investor angst is returning in Argentina, undermining gains for the peso, amid speculation a primary vote next month may underline support for leftist candidates

--With assistance from Karl Lester M. Yap, Alec D.B. McCabe and Philip Sanders.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan, Robert Brand

©2019 Bloomberg L.P.