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Emerging-Market Calm Set to Fray as Trade and Fed Angst Deepen

Netty Ismail, Lilian Karunungan and Sydney Maki

(Bloomberg) -- Emerging markets have rarely been so torn between trade-war tensions and optimism central banks will keep up their stimulus efforts, suggesting a week of greater-than-normal price swings is in prospect.

The U.S. and China are set to restart high-level trade negotiations in Washington on Thursday and Friday, with investors skeptical of a breakthrough as President Donald Trump battles Congress over its impeachment inquiry. Before that, all eyes will be on Federal Reserve Chairman Jerome Powell’s speeches on Tuesday and Wednesday as investors seek clues on whether the central bank will enact a third-straight reduction in interest rates later this month. Signs that the world’s biggest economy is slowing weighed on developing-nation stocks for a third week, while currencies strengthened as the dollar wobbled.

Chinese officials are increasingly reluctant to agree to a broad trade deal pursued by President Donald Trump, according to people familiar with the discussions. While China plans to make an offer, it won’t include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints, one of the people said.

“Trump may push to announce some sort of progress, given weaker markets and economy, but I doubt it will have much substance,” said Peter Kisler, a money manager at North Asset Management LLP in London. “We continue to be relatively bearish emerging-markets credit, although foreign exchange doesn’t look too bad.”

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Traders will also take their cue from China’s yuan fixing when the country’s markets re-open on Tuesday after a one-week holiday. Goldman Sachs Group Inc. remains negative on the currency in the near term as it expects U.S. tariffs on Chinese imports to be increased on Oct. 15. It’s also doubtful of a comprehensive trade agreement before the 2020 U.S. election.

While implied volatility for emerging-market currencies is near a two-month low, technical indicators suggest the calm may be about to end. The 50-day moving average is close to crossing above its 200-day measure. The last time that happened, in February 2018, it heralded a spike in volatility to a 2 1/2-year high in September that year.

Events and Data

Chinese data may continue to show economic weakening, but there are signs of stabilization too. Following the slight improvement in the official manufacturing PMI for September, the private gauge is expected to show Tuesday it stayed above the 50 levelServices PMI, one of the remaining bright spots in the economy, is forecast to have held upMonetary data including new yuan loans may be released during the week, with increases expected, given the central bank’s determination to boost lending after reserve-ratio cuts were announced on Sept. 6China’s foreign-currency holdings fell last month to $3.092 trillion, the lowest level since February, the central bank said on its website Sunday; that was below the median estimate of $3.106 trillion in a Bloomberg surveyTrade figures from the Philippines on Thursday will give further indications on how the trade war is affecting the rest of AsiaMalaysia will present its budget for 2020 on Friday. The Southeast Asian economy needs expansionary measures to counter trade tensions, Finance Minister Lim Guan Eng said last monthBrazilian data on Wednesday is expected to show benchmark inflation slowed below the mid-point of the central bank’s target range in September, supporting the case for more monetary easingAugust retail sales, to be released Thursday, will give clues about the pace of economic recoveryOn Thursday, Mexico’s central bank will publish the minutes of its September meeting, when members were split on the magnitude of cuts needed for the key overnight rateInflation in Latin America’s second-largest economy is expected to slow further amid lagging growth. The peso was among the best-performing emerging-market currencies in the past weekThe Peruvian central bank will set interest rates on Thursday amid a constitutional crisis following President Martin Vizcarra’s dissolution of Congress. The turmoil may pose a risk to growth and lead to a second rate cut this yearIsrael will probably hold its benchmark rate at 0.25% Monday, though the market is already pricing in a cut as the central bank’s next moveThe shekel has largely been resilient despite two national elections this year that ended in deadlock; it’s the world’s fourth-best performer in 2019 against the dollar

--With assistance from Karl Lester M. Yap and Carolina Wilson.

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, Paul Wallace

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