Trade War Tops Emerging-Market Worries Again as Skepticism Grows

(Bloomberg) -- The standoff between the U.S. and China is back at the top of emerging-market investor concerns as they assess how far they should price in a full-blown trade war.

President Donald Trump said Saturday it would be wise for China to “act now” to complete a trade deal with the U.S., after raising tariffs on $200 billion worth of Chinese goods and threatening more on Friday. The move prompted Beijing to say that it will be forced to retaliate with its own “countermeasures.” Expected swings in developing-nation currencies, a barometer of investor nerves, rose last week by the most since August as markets see-sawed on each twist and turn in the standoff.

“We are increasingly skeptical that any meaningful agreement or even progress will be made in the near future,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., which reduced its investments in emerging-market credit as tensions rose. “Bonds have not really priced-in the complete collapse of U.S.-Sino trade talks.”

Central banks in Indonesia, Mexico and Poland are set to hold policy meetings this week, with all three forecast to keep interest rates on hold as the external volatility rises.

Read more: Hold Tight for Volatility as Trade Turmoil Rattles Markets Anew

Stability Key

• Unlike their counterparts in Malaysia and the Philippines, policy makers in Indonesia are likely to prioritize keeping the rupiah stable rather than supporting growth, after the rupiah fell to a four-month low last week; Bank Indonesia will probably keep the policy rate unchanged on Thursday amid renewed trade tensions between the U.S. and China
  • “Indonesia’s central bank doesn’t seem ready to join in the easing cycle just yet,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note dated May 10
• Mexican monetary authorities will probably keep interest rates on hold and maintain a cautious tone when they meet on the same day. High inflation and greater external volatility reflect risks that may offset arguments for a less hawkish tone following weaker first-quarter economic growth
• Economists expect Poland’s central bank to maintain its key rate on Wednesday even after inflation accelerated in April to the highest in a year and a half

Argentine Inflation, Malaysian GDP

• Traders face another moment of truth when Argentina reports inflation data for April on Wednesday. The peso leads global losses in 2019 and inflation is running above 50% year-on-year. Bringing it down is one of the most pressing challenges for Mauricio Macri’s administration
• Brazil’s economic activity figures from March, due on Wednesday or Thursday, risk confirming analysts’ concern of a contraction in the first quarter. Meantime, the long slog continues in Congress for the all-important pension overhaul bill, as the lower house’s special commission holds new hearings
• With the lira underperforming its peers this quarter, Turkey’s current-account data due Monday will be in focus. Economists predict that the deficit probably widened in March. Turkey will also unveil industrial production and unemployment data this week
• Malaysia reports first-quarter GDP on Thursday. Its central bank cut its benchmark rate last week for the first time since July 2016 as the Southeast Asian nation braces for slower growth amid weaker global demand and rising trade tensions. The central bank is forecasting expansion of 4.3%-4.8% this year, while the government is targeting 4.9% growth in 2019, compared with 4.7% last year
• The Philippines holds its mid-term elections on May 13 to elect new lawmakers and local government officials. The entire lower house of Congress and half of the Senate will be up for re-election, but there will be no change in the presidency, whose current term ends in three years

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