Widening Trade Rift Means Rally in Emerging Markets Is All But Over
The trade war is set to become more hostile after Washington labeled Beijing a currency manipulator.
(Bloomberg) -- China may have handed traders a reprieve by disavowing the use of the yuan as a trade war tool, but a widening rift with the U.S. means investors may be better off selling into any relief rally in emerging Asian markets.
The trade war took a turn for the worse after Washington labeled Beijing a currency manipulator, days after vowing to slap more tariffs on Chinese goods. Even though the People’s Bank of China has said it won’t competitively devalue the yuan, its daily fixing has come under intense scrutiny for any signs of further weakening.
“We continue to be negative on the Asia complex, particularly those that are very export oriented,” Erin Browne, a portfolio manager at Pacific Investment Management Co., said in an interview with Bloomberg Television. “So think about Singapore, Taiwan, Korea, which we think are going to continue to come under pressure with the trade tensions and potential weakening further of the yuan.”
Emerging-market currencies and bonds have lost about 2% since the U.S. said on Aug. 1 it plans to slap more tariffs on Chinese goods. The onshore yuan has also dropped by the same magnitude, sliding past the key 7 level against the dollar on Monday.
While senior officials at the People’s Bank of China were said to have reassured foreign firms that the currency won’t continue to weaken significantly, the yuan continued to slide on Wednesday. The market turmoil has prompted intervention by Bank Indonesia, while South Korean authorities have repeatedly said they will act to stabilize markets.
“The ‘currency manipulator’ tag may be construed as a precursor to more aggressive trade action against China,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Traders may be inclined to adopt a ‘better safe than sorry’ mentality, preferring to stay out of the higher beta EM Asia FX currencies.”
South Korea’s won hovered near a three-year low Wednesday, while the Philippine peso dropped 0.7%. The Thai baht fell after the Bank of Thailand unexpectedly cut its benchmark rate, and said it could ease further as global risks surged. Global funds have sold $309 million of Indonesia’s bonds in the past two days.
“There will be an inflection point for investors to dip their toes in and position for a tactical rally or to monetize carry in high yielders, but not now,” said Jason Daw, head of emerging market strategy at Societe Generale SA in Singapore.
Trade Hedge
JPMorgan Asset Management has a different take on the sell-off engulfing risk assets. While trade tensions are likely to boost the dollar for now, emerging markets will eventually rebound as investors resume their hunt for yield, according to Tai Hui, its chief market strategist for Asia Pacific.
“Once we start to get a bit of stabilization -- hopefully sooner rather than later -- the yield differential, the carry idea will come back in to support some of the high-yielding EM currencies,” he said.
But for now, Salter Brothers Asset Management Pty is sticking with U.S. and unlisted investments on expectations that risk assets will fall further.
“Things are likely going to get worse by the end of the year for emerging markets,” said George Boubouras, director at Salter Brothers in Melbourne.
--With assistance from Chester Yung.
To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Kartik Goyal in Mumbai at kgoyal@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing, Joanna Ossinger
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