Markets WRAP: Eerie parallels on anniversary of pain as emerging markets stall

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08 May 2019

It isn’t good news for emerging markets if a rebound stalls in April and May: Last year, it marked the start of a multi-trillion-dollar meltdown from which investors have yet to recover. That’s why the recent selloff amid renewed trade tension has brought back memories of 2018, sending investors scurrying to buy protection through equity options and credit default swaps.

But Goldman Sachs Group and JPMorgan Chase & Co. say markets may be more resilient this time as the Federal Reserve has turned less hawkish and the growth outlook is better for many countries. After the best start since 2012, developing-nation stocks have fallen 4.4% from this year’s high, while currencies are heading for the longest weekly slump since July.

Volatility has returned and clouds are gathering for a number of vulnerable markets from Turkey to Argentina.

"For EM assets in particular, there are uncomfortable parallels to the experience of 2018," Goldman Sachs analysts Kamakshya Trivedi and Mark Ozerov wrote in an emailed note. "What is strikingly different, however, is the policy stance in the US and China."

It’s Different

At least two Fed policy makers prefer an interest-rate cut even though Chairman Jerome Powell sees little scope for a move in either direction. China continues a fragile recovery supported by months of economic stimulus even as its trade surplus dwindles. That’s a change from last year, when the Fed was firmly on the path of higher rates and China faced a growth shock from punitive US tariffs. While stocks, bonds and currencies had quickly rebounded from a correction since January 2018, the slump resumed in late April when the 10-year Treasury yield breached 3%. By August, it had snowballed into a rout, led by Turkey’s lira and reverberating as far as India and Indonesia.

Market conditions are more benign now. A reconsidered inflation outlook and less hawkish Federal Reserve helped 10-year US Treasury yields retreat from 3%. And the dollar has stopped rallying. Yet risky assets still face bearish momentum this quarter. Morgan Stanley cut its recommendation for local-currency securities to neutral last week, citing the dollar’s reluctance to weaken. Bank of America strategists said a trade agreement between the US and China and more concerted global growth are both needed in order for emerging markets to buck a trend of seasonal losses in May.

Flows into exchange-traded funds that invest in emerging market stocks and bonds turned negative last week for the first time since March as some investors deserted Chinese assets, according to data compiled by Bloomberg. Inflows this year still total $19 billion.

The lira has weakened to levels last seen during the selloff amid uncertainty over Turkish central bank policy, foreign-currency reserve levels and the outcome of municipal elections. In Argentina, upcoming elections and stubbornly high inflation are once again roiling assets. Yet the fact that these countries’ assets are starting the current phase of uncertainty at weaker levels may help limit a potential fallout, according to JPMorgan currency strategists including Anezka Christovova and Jonathan Cavenagh.

"External imbalances in Argentina and Turkey have improved as a source of concern, with EM currencies already a lot weaker over the last 12 months," they said in an emailed note. "This is helpful, although for both economies the market is now more focused on debt concerns than external imbalances." - Bloomberg

08 May 2019

President Donald Trump said China would prefer to negotiate a trade pact with his “weak” Democratic challengers to “ripoff” the US but he said that won’t happen and that he’s been told Chinese representatives are planning to make a deal.

Trump took at shot at his Democratic challengers, singling out former Vice President Joe Biden, saying China would prefer to negotiate with them. Biden has been criticised in recent weeks for playing down the economic threat posed by China, arguing the US is in a much stronger position than Trump credits it with. 

“The reason for the China pullback & attempted renegotiation of the Trade Deal is the sincere HOPE that they will be able to “negotiate” with Joe Biden or one of the very weak Democrats, and thereby continue to ripoff the United States (($500 Billion a year)) for years to come....” Trump tweeted on Wednesday.

In a subsequent tweet, he wrote, “Guess what, that’s not going to happen.”

Trump said in another tweet that, “China has just informed us that they (Vice-Premier) are now coming to the US to make a deal. We’ll see, but I am very happy with over $100 Billion a year in Tariffs filling US coffers.”

US stock futures briefly pared losses after Trump’s tweets, though investors remained on edge after a two-day trade-fomented rout wiped out more than $500 billion from the value of American equities. Treasuries trimmed an advance and the dollar held steady. Beijing’s top trade negotiator, Liu He, is traveling to the US on Thursday and Friday for high-stakes talks after Trump threatened to raise tariffs on billions in Chinese imports. US officials said Chinese negotiators reneged on provisions in a draft deal the US considered settled.

The developments raise the prospect that talks between the US and China to resolve their trade war, now more than a year long, could collapse entirely. - Bloomberg

08 May 2019

OVERVIEW: The South African rand strengthened as the country headed to the polls for a national election. By 14:20, the rand was changing hands at R14.36 to the greenback.

The global stock selloff triggered by worries over the outlook for trade extended into a third day, with US equity-index futures and European shares tracking declines across Asia.

The pound slipped as hopes for a Brexit breakthrough faded. Contracts for the S&P 500, Nasdaq 100 and Dow Jones Industrial Average had been stable for much of the European morning, but they extended losses as the session wore on.

The Stoxx Europe 600 Index tracked the move, with most sectors turning red. Equities fell earlier across Asia, with big declines seen in Japan and Hong Kong. The yen, gold and Treasuries climbed as investors sought haven assets. The euro edged higher on upbeat German factory data. Although broader market moves have eclipsed corporate results this week, earnings season continues apace. Commerzbank results were in line with estimates, while Siemens posted a beat. Toyota and Honda forecast profit and sales short of analysts’ estimates.

Lyft exceeded sales expectations after the close on Tuesday. The unexpected escalation of President Donald Trump’s rhetoric on trade in the past few days appears to have caught global equity markets off-guard. Many had been testing record highs, seemingly priced to perfection on the assumption a deal between the US and China would get done.

The likes of JPMorgan boss Jamie Dimon still put the odds of that at 80%, and the S&P 500 has only fallen to levels seen a month ago - nonetheless investors will be on edge as China’s top trade negotiator visits Washington this week.

“The two largest economic powerhouses, the US and China, either will be at a trade war or a trade peace and in reality there’s only a couple of people who know the answer to that and it isn’t those of us on Wall Street,” Larry Robbins, Glenview Capital Management’s CEO, told Bloomberg TV in New York. “It’s to be expected that there’s some volatility into this critical week.”

Elsewhere, the yuan edged lower as data showed Chinese exports unexpectedly fell in April and imports rose. The New Zealand dollar slumped more than 1% as the central bank cut interest rates, though it later pared most of the drop.

Oil swung between gains and losses.In emerging markets, the lira extended losses against the dollar amid the fallout from Turkey’s decision to re-run municipal elections in Istanbul.

These are the main moves in markets:


Futures on the S&P 500 Index fell 0.5% as of 8:30 New York time, the lowest in five weeks. The Stoxx Europe 600 Index declined 0.2% to the lowest in almost six weeks. The UK’s FTSE 100 Index dipped 0.2% to the lowest in almost six weeks. The MSCI Asia Pacific Index sank 1.1% to the lowest in almost six weeks.

The MSCI Emerging Market Index decreased 0.6% to the lowest in almost six weeks. 


The Bloomberg Dollar Spot Index increased 0.1%. The euro gained 0.1% to $1.1204, the strongest in more than a week. The British pound decreased 0.5% to $1.3012, the weakest in more than a week. The Japanese yen rose 0.1 percent to 110.11 per dollar, the strongest in more than six weeks. 


The yield on 10-year Treasuries declined two basis points to 2.44%, the lowest in almost six weeks. Germany’s 10-year yield dipped one basis point to -0.05%, the lowest in almost six weeks. Britain’s 10-year yield fell four basis points to 1.119%, the lowest in four weeks. 


Gold gained 0.5% to $1,291.18 an ounce, the highest in almost four weeks. West Texas Intermediate crude increased 0.4% to $61.67 a barrel. - Bloomberg

08 May 2019

European stock markets wobbled in opening trade on Wednesday, after heavy losses elsewhere on China-US trade concerns.

In initial trade, London's benchmark FTSE 100 index sank almost 0.2% to 7 249.01 points.

In the eurozone, the Paris CAC 40 index shed 0.1% to 5 388.72 points.

On the upside however, Frankfurt's DAX 30 rose 0.2% to stand at 12 110.87, compared with Tuesday's closing levels. - AFP

08 May 2019

Siemens AG posted strong second-quarter profit and outlined a plan to list its struggling power and gas division, a watershed moment in CEO Joe Kaeser's drive to dismantle the company's cumbersome conglomerate structure.

The shares surged the most in a year after the German company said adjusted earnings before interest, taxes and amortization from its main industrial business rose 7% to €2.41bn.

That beat an average analyst estimate of €2.23bn compiled by Bloomberg.

Order growth at the health-care Healthineers unit and strong returns at the digital factory division, which supplies plant-automation services, helped drive profits. - Bloomberg

08 May 2019

A sell-off in Chinese stocks threatens to take the fizz out of one of the country's biggest capital market reforms in years.

Sentiment has soured just as China plans to open a Nasdaq-style board, expected as soon as June. After surging at the start of the year, the Shanghai Composite Index has tumbled more than 11% from an April high.

It suffered its biggest loss since 2016 on Monday after US President Donald Trump threatened to impose higher tariffs on Chinese imports.

Worst still, given the nature of the new board, the ChiNext gauge of tech stocks fell even harder. - Bloomberg

08 May 2019

An unexpected fall in China's exports and an equally unforeseen rise in imports show that the world's second-largest economy continues a tentative recovery while global demand weakens and trade tensions re-escalate.

Exports dropped 2.7% in April versus a forecast 3% increase, while imports expanded by 4% compared to a projected slip, the customs administration said Wednesday.

Those misses highlight that the global slowdown is weighing down on China's growth, instead of the other way around, at least for now. Months of policy stimulus has fuelled a pickup in the Asian economy, although the re-escalating trade threats may throttle those green shoots. - Bloomberg

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08 May 2019

Commerzbank AG investors got more of the same after the breakdown of merger talks with Deutsche Bank AG.

The Frankfurt-based bank kept adding clients and boosting lending in the first quarter, with interest income rising 12%.

But turning that business into real money remains a challenge for Chief Executive Officer Martin Zielke as profit declined by more than half. - Bloomberg

08 May 2019

Stocks in Asia dropped as the U.S. threat of higher tariffs on imports from China continued to reverberate through global markets. The dollar slipped against most major peers.

Shares fell across the region with the brunt of declines seen in Japan and Hong Kong. The drop was more modest in China. The yen and gold climbed as demand returned for haven assets, though European and US futures were little changed.

Investor focus has turned to Washington for the visit of China's top trade negotiator later this week as President Donald Trump ratchets up pressure to clinch a deal that many market participants had expected was all but done.

Treasuries were steady.Earlier, US stocks had the broadest day of declines since the Christmas Eve sell-off, despite closing off the session lows. - Bloomberg

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