Emerging markets stumble as an Old Bugbear Gatecrashes Party

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(Bloomberg) – Just as early bets on emerging market recovery boost appetite for stocks and currencies, an old bugbear reappears to haunt investors: tensions between the US and China.

MSCI’s emerging markets stock index was in the red last week when China announced plans to impose a national security law on Hong Kong that deepened the friction between Washington and Beijing. There is growing evidence that President Donald Trump will make his stance on China a key element of his re-election offer. China’s Foreign Minister Wang Yi said Sunday that some Americans are pushing the two countries for a “new Cold War”.

“Until recently, market sentiment was rather constructive,” said Sebastien Barbe, Paris-based director of emerging market research at Credit Agricole CIB. “However, more clouds have accumulated in the emerging economies’ skies in the past few days, especially as tensions between the US and China have reappeared. The question of Hong Kong’s degree of independence from Beijing is now re-emerging, and this could further exacerbate these tensions in a way that markets may not like. “

Hong Kong protesters fought with the riot police at Sunday’s largest demonstration since the city’s corona virus broke out in January. China’s National People’s Congress continues this week after the process has begun, giving up the usual practice of setting a target for GDP growth.

Given the numerous rate cuts in the past week, investors expect a calmer political landscape. An unchanged rate is forecast for Hungary, Nigeria and Poland. Many countries have public holidays next week to mark the end of Ramadan, while Monday is also a public holiday in the United States and the United Kingdom.

China’s National People’s Congress

The main economic news from the National People’s Congress of China (NPC) has appeared after the Prime Minister’s work report, although the meetings last until May 28. China said it had its usual practice to set a numerical target for economic growth this year due to the turmoil caused by the pandemic. So far there is no news of whether the governor of the People’s Bank will speak of China, but easing expectations are likely to have risen due to the easing cut in reserve requirements in Li Keqiang’s work report. READ MORE: China abandons tough growth target, shifts focus on jobs The most surprising news was the new national security law on Hong Kong, which is expected to be voted on at the end of the NPC on May 28. This law appears to reduce the likelihood that Hong Kong will be judged to be sufficiently autonomous under the U.S. Law on Human Rights and Democracy, said Jude Blanchette, Freeman Chair for China Studies at the Center for Strategic and International Studies (CSIS) in Washington. Hong Kong could therefore be subject to the same customs regime as China. This also adds to the abundance of negativity in US-China relations. Bonnie Glaser, senior consultant for Asia and director of the China Power Project at CSIS, has argued that China will make some “harsh” statements about Taiwan during the NPC, and this could be from Xi Jinping himself. The relative calm of the Chinese currency during the NPC given the deterioration in US-China relations, the period can be examined this time. The offshore yuan has risen five times in the past seven annual meetings, while official pricing has been held steady. So the fix was generally below the Bloomberg survey, so last week

Asia

Taiwan’s April industrial production is due on Monday, while final quarterly GDP data will be released on Thursday. The preliminary publication had shown that the economy expanded by 1.54% compared to the previous year. The Taiwanese dollar has moved little as the US-China relationship deteriorates. However, this could change if the tension escalates rapidly. A wave of Covid 19 cases could have a limiting impact. Department store sales in the country’s April are also likely to improve from the very sharp decline in March – at least according to Google’s retail mobility report. Industrial production is also due to be released on Friday. The Bank of Korea is expected to cut rates by another 25 basis points on Thursday. Nevertheless, both reluctant dissenters left the policy board at the previous meeting. India’s first quarter GDP due next Friday is expected to remain slightly positive year-on-year. The market should look beyond this figure as the blockade in India only started to take effect at the end of the quarter. The situation worsened significantly in April when the PMI’s historic slump for services occurred. RBI confirmed this when it announced a surprising 40 basis point rate cut on May 22 and expected negative growth through March 2021 for the current fiscal year. The decline led to an immediate devaluation of the rupee, which had been on hold since the end of the quarter and was already lagging behind the Indonesian rupiah. Another high yielder in the region. The trade and current account figures for Thailand are due to be released next Friday. These will help assess the impact of the collapse in tourism compared to oil prices. The surplus declined in March – although, as this figure showed, the market must have a very large or persistent weakness to move the Thai baht, which has appreciated nearly 2% against the dollar since the last current of the month. Account details have been releasedPhilippines March transfers can also be released. The peso has remained one of the top performers among emerging market currencies since the pandemic spread worldwide in late January

EMEA

Poland has a busy week ahead of it. The central bank will hold its seventh bond auction on Wednesday, followed by the May interest rate decision the next day. Investors are looking for new comments and expect 33 basis points for further rate cuts in the next three months. The key interest rate is already at a record low of 0.5% after two cuts of 50 basis points in the past two months. Hungary holds an interest rate meeting on May 26. Policy makers are likely to confirm their policy of adding liquidity over longer maturities to reduce borrowing costs. Russia will hold a one-month repo auction on Monday, an emergency tool introduced by the central bank to support lenders’ finances in the Covid 19 crisis. Nigeria decides on interest rates on Thursday, with the base rate currently at 13.5%. Data available next week could show that economic growth in the first quarter slowed to 0.8% yoy, from 2.55%. Turkey’s GDP growth is likely to have slowed to 5.3% in the first quarter, down from 6% on Friday. Earlier in the week, reports of economic confidence, tourist arrivals and portfolio flows could provide clues to the impact of blocking measures that started towards the end of the quarter

Latin America

The coming week will be the key for Argentina. The government said on Friday that it would improve the terms of its $ 65 billion foreign bond restructuring offer after the last $ 500 million interest payment deadline was missed. Argentina extended the deadline for creditors to review its debt rescheduling offer until June 2. On Wednesday, the nation will report April trade balance data that Argentinians have spent on a virus-free ban. In Mexico, traders will be watching first quarter gross domestic product numbers on Tuesday for a better understanding of the impact of the pandemic. The central bank, which cut interest rates by 50 basis points this month, will publish an inflation report on Wednesday and its latest minutes of meetings on Thursday. Investors will also watch Brazilian politics as President Jair Bolsonaro’s government argues with health experts and governors over the Covid 19 crisis. Brazilian inflation data for the first half of May and the current account balance for April are due on Tuesday. First quarter gross domestic product data due to be released on Friday could show the early impact of virusChile’s copper production data released in April. This will be critical for investors hoping for signs of a recovery in Asian demand. The country’s unemployment rate for April, expected on the same day, is closely monitored after four consecutive months of growth. The Chilean nation’s peso has outperformed all of Bloomberg’s regional currency counterparts in the past three months. According to the economists surveyed by Bloomberg, Colombia is likely to cut its key interest rate from 3.25% to 2.75% on Friday. The nation enforces some of the region’s strictest blocking measures and seals its borders at least until the end of August

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