(Bloomberg) — Just as early bets on an emerging-market recovery start fueling appetite for stocks and currencies, an old bugbear is reappearing to haunt investors in coming weeks: U.S.-China tensions.
MSCI’s emerging-markets stock gauge moved into the red toward the end of last week as China announced plans to impose a national security law on Hong Kong, deepening the friction 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. China on Monday condemned the U.S. for adding 33 of its entities to a trade blacklist, after Foreign Minister Wang Yi warned earlier some Americans are pushing the two countries toward a “new Cold War.”
“The market mood had been rather constructive until recently,” said Sebastien Barbe, the Paris-based head of emerging-market research at Credit Agricole CIB. “However, more clouds have been accumulating in the emerging-market sky over the past few days, particularly as U.S.-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.”
Hong Kong protesters battled with riot police on Sunday in the biggest demonstration since the coronavirus swept through the city in January. The situation was quieter on Monday, though more protests are planned for later in the week. China’s National People’s Congress continues this week, after starting proceedings by abandoning the usual practice of setting a target for GDP growth.
The coming week will be key for Argentina. The government said Friday it will improve the terms of its offer to restructure $65 billion of overseas bonds after missing the final deadline for $500 million of interest payments. Argentina extended the deadline for creditors to consider its debt restructuring offer until June 2. On Wednesday, the nation will report trade balance data for April, which Argentines spent in a virus-induced lockdownIn Mexico, traders will eye first-quarter gross domestic product figures on Tuesday for a better understanding of the pandemic’s impact. The central bank, which cut rates by 50 basis points this month, will release an inflation report on Wednesday and its latest meeting minutes on ThursdayInvestors will also watch Brazilian politics as President Jair Bolsonaro’s administration feuds with health experts and governors about the Covid-19 crisis, just as the country becomes the second worst coronavirus hotspot in the world, with more than 363,00 cases. Brazilian inflation data for the first part of May and current account balance for April are due on Tuesday. Gross domestic product data for the first quarter, to be released Friday, may show the early impact of the virusChile’s April copper production data, to be posted on Friday, will be key for investors hoping for signs of a recovery in Asian demand. The nation’s unemployment rate for April, expected on the same day, will be closely watched after four straight months of increases. Chile’s nation’s peso has outperformed all of its regional currency peers tracked by Bloomberg during the past three monthsColombia is expected to reduce its key interest rate on Friday to 2.75% from 3.25%, according to economists surveyed by Bloomberg. The nation is enforcing some of the strictest lockdown measures in the region, sealing its borders through at least the end of August
With last week’s flurry of rate cuts now in 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 U.S. and U.K.
China’s National People’s Congress
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 reportREAD MORE: China Abandons Hard Growth Target, Shifts Stimulus Focus to JobsThe most surprising news has been around the new national security law on Hong Kong, a draft of 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 U.S. Human Rights and Democracy Act, according to Jude Blanchette, Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS) in Washington. Hong Kong could therefore be subject to the same tariff regime as China. An alternative would be to sanction Chinese entities along the lines suggested by Senators Pat Toomey and Chris Van HollenThis also adds to the plethora of negativity around U.S.-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 himselfThe Chinese currency’s relative calm during the NPC period is being tested given the deterioration in U.S.-China relations. The past seven annual sessions saw the offshore yuan rise on five occasions, and the official fixing was kept stable. While the fixing was generally stronger than the Bloomberg survey last week, Monday’s fix put it at the weakest level since 2008, failing to reassure the offshore yuan in early Monday trade.