Bruised Emerging Markets Brace for Reality of China's Trade Pain

(Bloomberg) -- China is poised to provide the latest signpost for emerging markets wounded by a week in which traders fretted over the prospect of slowing growth in the world’s biggest economies.

With investors still worried about the fallout from the trade war, China will this week announce industrial production and retail sales for February. Last week, Citigroup Inc.’s emerging market economic surprise index fell the most in more than four years, while the average extra yield investors demand to hold the foreign debt of developing nations, as measured by a JPMorgan Chase & Co. gauge, had its largest weekly jump since November as China cut its 2019 growth target and U.S. jobs data showed the weakest hiring in more than a year.

“China has fast become our main concern and we will also be analyzing the usual economic releases for signs the economy may be reaching a bottom,” said Anders Faergemann, a fund manager at PineBridge Investments in London that oversees $90 billion in assets.

Risk assets can still enjoy the tailwinds of a dovish-turning Federal Reserve and further stimulus from China, much as they did in 2016, when emerging markets embarked on an $8 trillion bull run, Faergemann said. Prices may also get a lift after People’s Bank of China Governor Yi Gang said at the weekend that China and the U.S. have reached consensus on many “crucial” issues and and have discussed the need to observe the “autonomy” of each other’s monetary policy.

All of which will test just how crowded the emerging-market trade has become.

“We likely need to see some position reduction and more signs of a pick-up in European growth before becoming constructive again on EM,” Morgan Stanley analysts including London-based James Lord said in a note last week. “At the moment, it is a matter of being patient and waiting for some additional risk premia to be built into EM assets again.”

Data Deluge

  • China will release figures on February credit growth, which reached a record high in January. Analysts warn the data is distorted by the Lunar New Year holidays last month
  • Turkey on Monday will announce fourth-quarter economic data, which will probably show that GDP contracted by the most since 2009. The nation’s current-account deficit probably narrowed in January
  • India unveils consumer and wholesale-price inflation on Tuesday and Thursday, respectively. The Reserve Bank of India may go for a second rate cut this year when policy makers meet on April 4 if inflation pressures ease
  • The Philippines will post data on overseas workers’ remittances, which have been insufficient to cover the trade shortfall
  • Trade figures from the three deficit countries in Asia will be released in the coming week: Philippines on Tuesday; India and Indonesia on Friday
  • Brazil will probably release inflation data Tuesday, following a report that showed Latin America’s largest economy expanded less than expected in the fourth quarter
    • The new central bank chief Roberto Campos Neto assumes his post on Wednesday after stressing the need for fiscal discipline and control over inflation last month
  • In Mexico, traders will watch January industrial production data for clues on whether activity has cooled under the new government. Inflation has slowed to within the central bank’s target range for the first time since 2016. The swap market is showing bets on a decline in borrowing costs in the second half of 2019
  • Argentina’s February inflation data will probably show further acceleration and underline pressure on the peso. The currency recovered Friday from a record low as the central bank raised its benchmark rate and tweaked its monetary policy to improve liquidity

--With assistance from Rita Nazareth, Aline Oyamada, Alec D.B. McCabe, Lilian Karunungan and Tomoko Yamazaki.

To contact the reporters on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net, Dana El Baltaji

©2019 Bloomberg L.P.

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