EM rally stumbles as an old bugbear gatecrashes party
May 23 2020 03:53 AM
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Bloomberg/New York

Just as early bets on an emerging-market recovery started fuelling appetite for stocks and currencies, an old bugbear reappeared to haunt investors: Tensions between the US 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 US-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 US and UK.
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 report.
The 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 US Human Rights and Democracy Act, according to Jude Blanchette, Freeman Chair in China Studies at the Centre 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 Kong.
This also adds to the plethora of negativity around US-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 US.
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 US-China relations, although, though that could easily change should the tension escalate rapidly.
South 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 released.
The 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 board.
India’s first-quarter GDP, which is due on 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 occurred. The RBI acknowledged this when announcing a surprise 40 basis cut in interest rates yesterday, 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 region.
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 months.
Hungary 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 forint.
Russia 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 crisis. Nigeria 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%.
Latin America: The coming week will be key for Argentina, which faces a 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 $500mn. 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 lockdown.



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