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The emerging-market rally that has all but wiped out the losses since the start of the coronavirus pandemic looks headed for a late-August reappraisal amid a resurgence of trade tensions and delays to a US stimulus.
Indices of stocks, currencies and domestic bonds rose in tandem last week, with the MSCI equity gauge clocking up its longest sequence of weekly gains since January, even as idiosyncratic risks across developing nations mounted.
China’s retail sales and industrial production data missed estimates, Malaysia’s and Thailand’s economies shrank the most since the Asian financial crisis, Brazil suffered a fresh bout of political turmoil and Turkey struggled to shore up the lira.
That resilience may now be tested as US-China relations worsen in the run-up to America’s presidential election. President Donald Trump last Friday ordered the Chinese owner of the popular music video app TikTok to sell its US assets, as both countries postponed talks planned for the weekend aimed at reviewing progress on the phase-one trade deal.
Meantime, Taiwan formally signed an agreement to buy F-16 jets built by Lockheed Martin Corp., a move likely to be denounced by Beijing.
“Markets will begin to price more caution given the upcoming volatile US election, and particularly if US-China animosities do not ebb away,” said Ehsan Khoman, the head of Middle Eastern research at MUFG Bank in Dubai.
Uncertainty about whether further US government stimulus will be enacted, with negotiations still in deadlock, may also sap risk appetite in the coming days.
Minutes of the Federal Reserve’s July meeting due today will probably offer clues on what the central bank’s next steps may be to increase policy accommodation.
“The sharp rally in risk markets leaves less obvious upside,” Morgan Stanley New York-based strategist Michael Zezas wrote in a note.
“Another round of stimulus is the difference between ensuring that the economic recovery continues uninterrupted and a meaningful short-term pullback in growth. It may also be the difference between a confident six to 12-month view on a variety of risk assets and a meaningful near-term correction.”
While traders will focus on interest-rate decisions in Indonesia and the Philippines this week, the most significant policy meeting may be in Turkey, where the central bank has resorted to backdoor monetary tightening to anchor the lira. – Bloomberg
Online Reporter