Tit-for-tat trade wars to keep pressure on markets

Netty Ismail, Lilian Karunungan, Justin Villamil and Alex Nicholson

It may be starting to sound like a broken record for emerging markets, with the twists and turns of US-China trade tensions likely to dominate investor concerns this week.

That’s not to say Federal Reserve chairman Jerome Powell’s two-day Congressional testimony and even any fallout from yesterday’s meeting between Donald Trump and Vladimir Putin in Finland won’t have a part to play in driving sentiment.

Emerging markets have become trickier to navigate as investors brace for outsized volatility.

The gap between a JPMorgan Chase gauge of expected volatility in developing-nation currencies and a Group-of-Seven measure was at the highest level since 2011 at the end of last week.

That’s depriving investors of a cheap way to protect against risks in emerging markets.

“We remain concerned that the vicious cycle of tit-for-tat tariffs may accelerate in the coming weeks,” said Piotr Matys, a strategist at Rabobank in London.

“This in turn would fuel risk aversion, leaving various emerging-market currencies particularly vulnerable against the US dollar, which continues to benefit from capital outflows from emerging markets to US assets,” he said.

Trade tensions are likely to get worse before they get better and Asian currencies such as South Korea’s won and Taiwan’s dollar are set to weaken further, Goldman Sachs Group strategists including New York-based Zach Pandl wrote last week.

Markets will be on the lookout for the resumption of negotiations over trade between the US and China after they exchanged retaliatory threats last week.

President Trump raised the stakes last week by moving forward with plans to impose tariffs on another $200bn (€171bn) of Chinese imports.

As if the trade tensions aren’t enough to contend with, investors will also keep an eye on the outcome of the Putin-Trump summit.

The meeting came after US special counsel Robert Mueller indicted 12 Russian intelligence officers for hacking offences designed to undermine the Democratic Party in the 2016 US presidential campaign.

Though few investors expect a major thaw in relations, some have been buying Russian assets purely on the grounds that any meeting is better than no meeting at all.

The US imposed its toughest sanctions to date in April as punishment for Moscow’s alleged elections meddling.

The testimony of the US central bank’s Mr Powell will be key for the dollar, according to NatWest Markets.

The Fed chairman will deliver his testimony to the Senate Committee later today and appears before the House panel tomorrow.

Judging by recent data, “there is little reason for the Fed to sound hawkish,” said Henrik Gullberg, head of emerging-market trading strategy at Nomura International in London.

Meanwhile, the price of crude oil slid amid signs of a looming onslaught of supplies from Saudi Arabia to the US.

The US benchmark, West Texas Intermediate dropped $2.43 to $68.58 a barrel in New York, while Brent crude dropped $2.64 to $72.69 a barrel on the London-based ICE Futures Europe Exchange.

The Saudis offered additional cargoes of crude to Asian customers, according to sources.

In the US, Mr Trump was said to be considering tapping the nation’s emergency oil supply to tame rising fuel prices. Between them, the kingdom and the US pump about one-fifth of the world’s crude.

“It very much seems like a continued reaction to potential supply increases,” said Bart Melek, head of global commodity strategy at TD Securities in Toronto.

The combination of the supply-side effect and the potential for less demand as a result of trade woes that we’re seeing, are prompting people to take some of the long bets off oil right now

As Saudi Arabia took steps to fulfill its pledge to offset supply losses from other Opec states, Russian Energy Minister Alexander Novak said the cartel and its allies could boost output by more than 1 million barrels a day if needed.

At the same time, investors focused on the trade tensions between the US and China that could threaten energy demand.

Bloomberg


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