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Agility Is the Watchword as Trade Tensions Jolt Emerging Markets

Netty Ismail, Marcus Wong and Justin Villamil
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Agility Is the Watchword as Trade Tensions Jolt Emerging Markets

(Bloomberg) -- The trade war is taking a turn for the worse just as investors digest one of the roughest weeks for emerging markets this year.

China responded to Donald Trump’s latest tariff threat by asking state-owned enterprises to suspend imports of U.S. agricultural products and letting the yuan slide past 7 to the dollar to the weakest level in more than a decade. The U.S. president called the move “currency manipulation” and indicated the Federal Reserve should respond. Trump last week threatened to put 10% tariffs on a further $300 billion of Chinese goods. The latest showdown puts the Asian nation’s trade data on Thursday in the spotlight amid concern the year-long dispute is hurting its economy.

“The risk to emerging-market assets in the near term is skewed to the downside,” said Patrick Wacker, a fund manager at UOB Asset Management Ltd. in Singapore who locked in some profit ahead of the Fed’s decision. “With assets having to price in more risk for global growth and trade policy, we do not believe right now is the best time to add bonds most sensitive to market swings.”

Emerging-market currencies headed for their biggest decline since June 2016, while stocks dropped to the lowest since January on a closing basis. Assets have been under pressure since last week after the Fed, while cutting rates for the first time in more than a decade, stopped short of signaling it was the start of an aggressive easing cycle. Morgan Stanley turned bearish on emerging-market credit soon after removing a bullish call on currencies, while Citigroup Inc. said it’s time to cut risky wagers.

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The drop in the yuan is expected to put quite a sharp downward pressure on currencies of economies with deep ties with China such as the South Korean won and Taiwan dollar, while the Indonesian rupiah and Indian rupee are expected to remain more resilient, according to Tsutomu Soma, general manager of the investment trust and fixed-income securities at SBI Securities Co. in Tokyo.

The central banks of the Philippines and India are forecast to lower rates this week, and South Korea is preparing to announce details of a plan to remove Japan from its easy-trade list as the countries’ political standoff intensifies.

“This once again shows that it’s foolish to make long-term predictions on markets and anchor positions to predictions,” said Nader Naeimi, AMP Capital’s head of dynamic markets in Sydney. “I can’t remember any other time that agility and flexibility was so paramount.”

Trump Thumps China

The Trump administration is expected to publish in “days” the final list of Chinese goods subject to the new 10% tariff effective Sept. 1Beijing won’t seek competitive depreciation or use its currency as a tool to cope with the trade dispute, PBOC Governor Yi Gang said in statement on websiteChina’s exports and imports likely fell in July from a year earlier, dented by higher U.S. tariffs

More Rate Cuts

Almost of all the economists surveyed by Bloomberg forecast the Reserve Bank of India will cut the repurchase rate by 25 basis points to 5.5% Wednesday, after having eased three times so far this yearThe rupee was the worst-performing emerging-market currency as the government revoked the special constitutional status of Kashmir in a move that risks worsening its already fraught security relationship with rival Pakistan in the disputed regionConsensus is that the Philippine central bank will reduce its key rate by 25 basis points, its second cut this yearPeru’s central bank may consider cutting its benchmark rate on Friday after officials signaled additional stimulus is an option amid weaker-than-expected economic growth and tame inflationThailand is set to keep rates on hold WednesdayRead more: Yuan’s Slump Puts Asia’s Rate-Cutting Central Banks on Alert

Brazil’s Pension Overhaul

Congress returns from a two-week recess to hold a second-round vote on President Jair Bolsonaro’s flagship pension overhaulBrazil’s central bank minutes are due for release on Tuesday after the country kicked off a monetary-easing cycle on July 31. The real has outperformed all Latin American peers except Mexico’s peso so far this quarterThe nation will release inflation data and June retail sales, which will signal whether the country tipped into a recession

Economic Highlights

The lira strengthened on Monday. Data showed a slowdown in Turkish inflation took a pause in July as the government rebuilds its coffers with higher taxes while the central bank loosens monetary policyConsumer prices rose 16.7% from a year earlier after a three-month decelerationIndonesia’s economic growth was little changed in the second quarter, with gross domestic product rising 5.05% from a year ago. The Bank Indonesia governor previously linked future monetary-policy easing to the domestic growth outlookThe Philippines will report GDP data on Thursday, before the central bank rate decisionInvestors will be eyeing trade numbers from the Philippines and Taiwan due WednesdayColombia will publish CPI data on Monday, Taiwan and the Philippines on TuesdayArgentina is set to release construction and industrial statistics on Tuesday that may provide evidence of the economy’s recovery. The figures will be published before a key primary vote for the presidential election on TuesdayJune economic activity data in Chile, due on Monday, may support the case for a rate cut in September by the central bank

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

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Marcus Wong in Singapore at mwong547@bloomberg.net;Justin Villamil in Mexico City at jvillamil18@bloomberg.net

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

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