Yield-Hungry Emerging-Market Traders Seek Cue From Trump and Xi

(Bloomberg) -- Emerging markets are entering a pivotal week as investors look to see whether the U.S. and China can find a path toward a trade agreement when their two leaders meet in Japan.

Developing-nation currencies and bonds just staged their best weekly performance since 2017 after the Federal Reserve and the European Central Bank signaled the prospect of looser monetary policy. Now all eyes turn toward President Donald Trump’s meeting with Chinese counterpart Xi Jinping at the June 28-29 summit of Group of 20 nations in Osaka as they try to head off a further escalation in the trade war between the world’s two biggest economies.

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“With yields across the developed world getting back to ridiculously low levels, it makes emerging-market debt assets all the more attractive,” said Eric Stein, a Boston-based money manager at Eaton Vance Corp., an investment-management firm that oversees about $470 billion globally. “Certainly, there are risks and the G-20 is one of them. It’s tough to know exactly what is priced in for the meeting, but I think the baseline of many market participants is a kick-the-can-down-the-road kind of agreement.”

Risks in the Persian Gulf are also back on investors’ radars, with Iran set to breach a cap on its enriched-uranium stockpile by Thursday, potentially heightening tensions with the U.S. Trump said Saturday he intends to impose additional economic sanctions on Iran Monday, and that military action is “always on the table until we get this solved.”

Trade Talks and Fed

• The U.S. put five more Chinese tech entities on a trade blacklist just days before the Trump-Xi summit, after a similar move on Chinese telecommunications giant Huawei Technologies Co. last month
• Teams on both sides are implementing their leaders’ request that they have further discussions to find a solution, Chinese Vice Minister of Commerce Wang Shouwen said on Monday
• Only after both sides experience the increasingly negative effects of the trade war later in the year will they be prepared to make concessions and finally strike a deal, according to ING
  • Even if Trump and Xi are open to resuming talks, “there are many bridges to cross before a deal is struck,” ING analysts, including Raoul Leering, wrote in a report. “We’re confident that a resolution will eventually be reached though, which limits the need for aggressive Fed rate cuts”
  • Investors will focus on Fed Chairman Jerome Powell’s speech at a Council on Foreign Relations event on Tuesday as they seek clues on the likely timing of any rate cut

Central Banks on Hold

• Bank of Thailand is expected to keep its benchmark rate unchanged at 1.75% on Wednesday, according to almost all economists in a Bloomberg survey
  • A slowing global economy and a dovish tilt by neighboring central banks both indicate diminished scope for higher borrowing costs, Kanit Sangsubhan, a member of the central bank’s monetary policy committee, said last month
  • The monetary authority, which lowered its 2019 growth forecast in May, last moved in December with a rate hike
  • The baht is the best-performing Asian currency this year
• Mexico’s central bank is expected to leave its benchmark interest rate unchanged at a 10-year high on Thursday, even amid the threat of a recession, as inflation remains high and trade concerns linger. High rates have bolstered carry trades in the Mexican peso
• Minutes of Brazil’s June 19 central bank meeting are to be released on Tuesday, after the central bank kept its key rate at an all-time low of 6.5% and said further easing depends on the progress of a pension-overhaul bill in Congress. Traders will scour the documents for details about what policy makers make of the bill’s progress so far
  • Brazil’s monetary council will also set an inflation target for 2022 on Thursday
• Hungary and the Czech Republic are also set to keep rates on hold this week

Chinese Data, Turkey

• As Trump and Xi meet, China will release final current-account data on Friday for the first quarter. Chinese industrial profit data, which come out on Thursday, are likely to show another decline in May, according to Bloomberg Economics
• Turkish opposition candidate Ekrem Imamoglu won the redo of the Istanbul mayor’s race by a landslide on Sunday, in a stinging indictment of President Recep Tayyip Erdogan’s economic policies and his refusal to accept an earlier defeat
  • The lira rallied almost 2% on Monday as Imamoglu’s margin of victory broadened to nearly 800,000 votes from 14,000 in the March 31 balloting
• Brazilian lawmakers are expected to vote on a report about the pension bill that will be sent for the approval of deputies on the floor of the lower house. According to Folha de Sao Paulo, Chief of Staff Onyx Lorenzoni reached an agreement with lower house Speaker Rodrigo Maia and party leaders to vote on the bill in the Chamber of Deputies by the first half of July
• The first signs of a second-quarter economic comeback in Argentina may come on Wednesday, when activity data is released for April. Positive numbers would be a welcome sign for Macri’s administration as the president fights to keep his re-election bid alive. The Argentine peso rallied almost 3% last week, the best showing since early May
• Bloomberg will hold the Emerging + Frontier Forum 2019 in London on Tuesday
  • Speakers will include Indonesia’s Minister of Finance Sri Mulyani Indrawati; Egyptian central bank Governor Tarek Amer; Adnoc CEO Sultan Ahmed Al Jaber and Yerlan Syzdykov, global head of emerging markets at Amundi Asset Management

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

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Justin Villamil in Mexico City at jvillamil18@bloomberg.net;Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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

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