Emerging-Market Rally Stumbles as Old Bugbear Gatecrashes Party

(Bloomberg) — Just as early bets on an emerging-market recovery started fueling appetite for stocks and currencies, an old bugbear reappeared to haunt investors: tensions between the U.S. and China.

MSCI’s emerging-markets stock gauge moved deep into the red after a positive start to the week as China announced plans to impose a national security law on Hong Kong, which threatened to further escalate tensions between Washington and Beijing. Signs are mounting that President Donald Trump will make his tough-on-China stance a key element of his re-election bid, while China has warned that it will safeguard its sovereignty, security and interests, and threatened countermeasures.

“The market mood had been rather constructive until recently,” said Sebastien Barbe, the Paris-based head of emerging-market research at strategy at Credit Agricole CIB. “However, more clouds have been accumulating in the EM sky over the past few days, particularly as U.S.-China tensions have been re-emerging. The issue of the degree of independence of Hong Kong vis-à-vis Beijing is now reappearing, and this could fuel these tensions further, in a way the markets may not like.”

China’s National People’s Congress continues next week, after starting proceedings by abandoning the usual practice of setting a target for GDP growth. With this week’s flurry of rate cuts a thing of the past, investors expect a more sedate policy landscape. Hungary, Nigeria and Poland are forecast to leave rates unchanged. Many countries have public holidays next week to mark the end of Ramadan, while Monday is also a holiday in the U.S. and U.K.

China’s National People’s Congress

The main economic news from China’s National People’s Congress (NPC) is out following the Premier’s work report, although meetings continue until May 28. China said it has abandoned its usual practice of setting a numerical target for economic growth this year due to the turmoil caused by the pandemic. There is no news so far on whether the People’s Bank of China Governor will speak, but easing expectations are likely to have been raised by the flagging of reserve requirement cuts in Li Keqiang’s work reportREAD MORE: China Abandons Hard Growth Target, Shifts Stimulus Focus to JobsThe most surprising news has been around the new national security law on Hong Kong, which is likely to be voted on at the end of the NPC on May 28. This law seems to reduce the chance of Hong Kong being judged as sufficiently autonomous under the U.S. Human Rights and Democracy Act, according to Jude Blanchette, Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS) in Washington. Hong Kong could therefore be subject to the same tariff regime as China, and may also lead to renewed protests in Hong KongThis also adds to the plethora of negativity around U.S.-China relations. Bonnie Glaser, senior adviser for Asia and the director of the China Power Project at CSIS, has argued that China will have some “tough” statements about Taiwan during the NPC, and this may come from Xi Jinping himself. Markets may also be interested in the Foreign Minister’s speech, which could also have some choice words for the U.S.The Chinese currency’s relative calm during the NPC period may be tested this time given the deterioration in U.S.-China relations. The past seven annual sessions saw the offshore yuan rise on five occasions, while the official fixing was kept stable. The fixing has been generally below the Bloomberg survey so far this week

Asia

Taiwan’s industrial production for April is due on Monday, while its final first-quarter GDP data come out on Thursday. The preliminary release had shown the economy expanding 1.54% year-on-year. The Taiwan dollar has been the second-strongest emerging-market currency after the Philippine peso since Jan. 20, around the time when the Covid-19 crisis began. The Taiwan currency has also, thus far, been insensitive to the deterioration in the U.S.-China relations, although, though that could easily change should the tension escalate rapidlySouth Korea’s May consumer confidence data due Tuesday should show a recovery from the post financial crisis lows — although the modest second-wave of Covid 19 cases might have a limiting impact. The country’s April department store sales should also show an improvement from the very steep contraction in March –- at least judging from the Google mobility report relating to retail. On Friday, industrial production is also scheduled to be releasedThe Bank of Korea is expected to cut rates on Thursday by a further 25 basis points. That said, both dovish dissenters at the previous meeting have left the policy boardIndia’s first-quarter GDP, which is due next Friday, is expected to remain in marginally positive year-over-year territory. The market is likely to look beyond this number, as the lockdown in India only started to bite late in the quarter. The situation worsened significantly in April when the historic collapse in services PMI occurredThe RBI acknowledged this when announcing a surprise 40 basis cut in interest rates on May 22, saying that it expected growth to be negative for the current fiscal year ending March 2021. The cut caused immediate depreciation in the rupee — which had been in a holding pattern since the end of the quarter, already vastly underperforming the Indonesian rupiah, another high-yielder in the regionThailand’s trade and current account numbers are due for release next Friday. The country’s current-account numbers are interesting to gauge the impact of the collapse in tourism, versus that of oil prices. March saw a plunge in the surplus — although, as that number showed — the market needs to see very major or persistent weakness to move the Thai baht, which has appreciated almost 2% against the dollar in the month since the last current-account data was releasedPhilippines March remittances may also be released. The peso remains the top performer among emerging-market currencies since the pandemic outbreak in late January

EMEA

Poland has a busy week ahead. The central bank will hold its seventh bond-buying auction on Wednesday, followed the next day by its May rates decision. Investors are on the lookout for any new comments and are pricing in 33 basis points of further rate cuts over the next three months. The key rate is already at a record low at 0.5% after two 50bps cuts in the last two monthsHungary holds a rates meeting on May 26. The decision isn’t expected to produce any fireworks and rate setters will probably confirm their policy of adding liquidity at longer maturities to cut borrowing costs, while draining it at the short end at elevated levels to support the forintRussia is due to hold a one-month repo auction on Monday, an emergency tool introduced by the central bank to shore up lenders’ finances amid the Covid crisisNigeria decides on interest rates on May 28, with the key rate currently at 13.5%. Data due next week may show economic growth slowing to 0.8% year-on-year in the first quarter, from 2.55%Turkey’s GDP growth likely slowed to 5.3% in the first quarter, from 6%, data may show on Friday. Earlier in the week, reports on economic confidence, tourist arrivals and portfolio flows may give an indication on the effect of lockdown measures that started toward the end of the quarter

Latin America

The coming week will be key for Argentina, which faces a May 22 deadline to strike a debt restructuring deal with bondholders. The date also aligns with the end of the grace period for interest payments of about $500 million. Failure to reach an agreement or pay by that date would mean default. On Wednesday, the nation will report trade balance data for April, which Argentines spent in a virus-induced lockdownArgentina is planning to revise its offer to creditors to restructure $65b in foreign debt, Reuters reported earlier, citing an interview with Economy Minister Martin Guzman late on May 21In Mexico, traders will eye first-quarter gross domestic product figures on Tuesday for a better understanding of the pandemic’s impact. The central bank, which cut rates by 50 basis points this month, will release an inflation report on Wednesday and its latest meeting minutes on ThursdayInvestors will also watch Brazilian politics as President Jair Bolsonaro’s administration feuds with health experts and governors about the health crisis. Brazilian inflation data for the first part of May and current account balance for April is due on Tuesday. Gross domestic product data for the first quarter, to be released Friday, may show the early impact of the virusChile’s April copper production data, to be posted on Friday, will be key for investors hoping for signs of a recovery in Asian demand. The nation’s unemployment rate for April, expected on the same day, will be closely watched after four straight months of increases. Chile’s nation’s peso has outperformed all of its regional currency peers tracked by Bloomberg during the past three monthsColombia is expected to reduce its key interest rate on Friday to 2.75% from 3.25%, according to economists surveyed by Bloomberg. The nation is enforcing some of the strictest lockdown measures in the region, sealing its borders through at least the end of August

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