Too many risks for emerging markets to get China lift
Emerging markets may need more than a surprise recovery in Chinese manufacturing to exorcise the pain of November.
Though data unexpectedly showed China’s official manufacturing purchasing managers’ index (PMI) surged past the 50 level for the first time since April, the on-off state of the trade talks, currency weakness in Latin America against a backdrop of popular unrest, and a slump in India’s economic growth are likely to curb investor enthusiasm, Bloomberg reported.
MSCI Inc.’s gauges of emerging market stocks and currencies dropped for the third successive week in the five days through Friday, capping their first November declines since 2016. A Bloomberg Barclays index of local-currency bonds fell for a fourth straight week.
A combination of falling relative returns, the slowing pace of interest-rate cuts and a weakening growth outlook are keeping emerging markets in check headed into December. And there’s little sign of a turnaround any time soon, according to HSBC Plc.
“The conditions are not seen coming together for emerging-market currencies to stage a broad-based recovery,” Hong Kong-based Paul Mackel and Ju Wang said. “It will be another frustrating year for EM foreign exchange.”
Markets are waiting for China’s response after President Donald Trump signed a bill backing Hong Kong’s protesters, a move that could complicate the signing of the phase one trade deal. China’s foreign ministry reiterated a threat of retaliation on Thursday.
The Hong Kong bill requires annual reviews of the city’s special trading status under US law and sanctions officials deemed responsible for human rights abuses and undermining the city’s autonomy. A second Hong Kong measure also bans the export of crowd-control items such as tear gas and rubber bullets to the city’s police.
“The market is back on Beijing watch to see if this bill could be a trade deal breaker,” Stephen Innes, chief Asia market strategist at AxiTrader in Bangkok, wrote in a note. “The big question is, does China decide to compartmentalize the Hong Kong issues away from the phase one deal? So that’s where the risk lies now.”
China’s government wants tariffs to be rolled back as part of the phase one trade deal with the US, Global Times said in a tweet on Sunday, citing unidentified people in Beijing. The paper reported that a US pledge to scrap scheduled Dec. 15 tariffs cannot replace the rollback in existing ones.
India’s deepening slowdown is raising the pressure on the central bank to extend its monetary easing when it meets Thursday. The Reserve Bank of India will lower the benchmark rate by 25 basis points to 4.9 percent, according to the median of 16 economist forecasts compiled by Bloomberg.
GDP growth tumbled to 4.5 percent in the July-September quarter from five percent in the previous three-month period, the first time it’s been below five percent since 2013, data showed. Policy makers could make a deeper reduction of 40 basis points if growth surprises to the downside, Bloomberg Economics said before the report was released.
The Reserve Bank of India has been the most aggressive among emerging Asian central banks to cut rates this year, lowering a combined 135 basis points since February. The rupee is the worst performer among emerging Asian currencies in the second half of this year, losing 3.8 percent.
Elsewhere in Asia, China will report Caixin PMI for manufacturing and services on Monday and Wednesday, respectively. Factory PMIs from Taiwan, South Korea, Malaysia, Thailand, Philippines, Indonesia and India were due on Monday. Malaysia will release its trade data for October on Wednesday. Inflation data will come Monday from South Korea, Thailand and Indonesia, while Taiwan and the Philippines will release their own on Thursday.
South Korea’s exports fell more than expected in November, a trade ministry report showed Sunday. Exports dropped 14.3 percent from a year earlier in November for a sixth straight double-digit decline, the data showed.
Chile will be in the spotlight Monday as the central bank embarks on the first stage of an intervention strategy announced last week to contain swings in the peso. The bank will sell $200 million each day this week, and place another $200 million in the forwards market. The peso was the worst-performing currency in emerging markets in November, weakening 8.6 percent.
Meanwhile, the central bank holds a policy meeting Wednesday at which it’s forecast by most economists to cut interest rates by 25 basis points to 1.5 percent.
Argentina’s President-elect Alberto Fernandez announces his economic team on Friday, an event that may signal what policies and debt negotiations the new administration will pursue. The peso is still the world’s worst performing currency of 2019.
In Brazil, money managers will watch third-quarter GDP figures on Tuesday for any sign that monetary easing has had an effect on growth. November inflation data to be released on Friday will probably flag a comeback, and Wednesday’s industrial production numbers for October are expected to show a pick up in activity.
Saudi Aramco’s IPO is due to price Thursday. The Saudi government plans to raise more than $25 billion by selling a 1.5 percent stake in the world’s biggest oil producer at a valuation of between $1.6 trillion and $1.7 trillion.
Elsewhere, investors turn their attention to a slew of PMIs across the Europe, Middle East and Africa region next week, with manufacturing data for Russia, South Africa, Poland and Hungary due on Monday.
Poland’s monthly central bank meeting is due Tuesday and Wednesday. All economists polled predict the central bank will extend its record run of rates on hold, leaving the benchmark rate at 1.5 percent. The week will close with the central bank’s official reserves data for November.
Oil rises over 1% on hopes for deeper OPEC cuts
Oil prices rose more than one percent on Monday as signs of rising manufacturing activity in China pointed to increasing fuel demand, and hints that OPEC may deepen output cuts at its meeting this week indicated supply may tighten next year.
Brent crude futures rose 76 cents, or 1.3 percent, to $61.25 a barrel by 0415 GMT. West Texas Intermediate (WTI) futures rose 91 cents, or 1.7 percent, to $56.08 a barrel, having risen by more than $1 earlier, Reuters reported.
WTI futures settled 5.1 percent lower while Brent plunged 4.4 percent on concerns that talks to end the trade war between the United States and China, the world’s two biggest oil users, would be disrupted by US support for protesters in Hong Kong.
But oil rose on Monday after factory activity in November in China, the world’s biggest oil importer, increased for the first time in seven months because of rising domestic demand amid government stimulus measures.
“At the open, prices remain supported by the surprising resilient China factory activity with the forward-looking PMI’s beating expectations,” said Stephen Innes, chief Asia market strategist at AxiTrader.
Prices were also supported after Iraq’s oil minister said on Sunday that OPEC and allied producers will consider deepening their existing oil output cuts by about 400,000 barrels per day (bpd) to 1.6 million bpd.
The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, known as OPEC+, are expected to at least extend existing output cuts to June 2020 when they meet this week.
The OPEC+ group has coordinated output for three years to balance the market and support prices. Their current deal to cut supply by 1.2 million bpd that started from January expires at the end of March 2020.
OPEC’s ministers will meet in Vienna on Dec. 5 and the wider OPEC+ group will meet on Dec. 6.
Ministers will either take no action, extend the cuts without change, or deepen them, ING Economics said in a note.
“We believe that only the final scenario would be constructive for oil prices,” ING said.
OPEC oil output fell in November as Angolan production slipped due to maintenance and Saudi Arabia kept a lid on supply to support prices before the initial public offering of state-owned Saudi Aramco, a Reuters survey found.
On average, OPEC pumped 29.57 million bpd last month, according to the survey, down 110,000 bpd from October’s revised figure.
But US production keeps rising, filling the gaps left by OPEC, with output in September increasing to a new record of 12.46 million barrels per day (bpd), the US government said in a monthly report on Friday.
Indonesia’s November inflation
Indonesia’s consumer price index (CPI) increased three percent year-on-year in November, well within the central bank’s targeted range of between 2.5 percent and 4.5 percent for 2019, Statistics Indonesia (BPS) announced on Monday, thejakartapost.com reported.
South Korea completes repayment of $41b worth of Treasury debts for this year
South Korea has completed repayment of a total of 48.7 trillion won ($41.2 billion) worth of Treasury debts sold for this year, the Finance Ministry said Monday.
By repaying 1.5 trillion won worth of the debt last Thursday, the government bought back all Treasury bills that were sold for this year, the Ministry of Economy and Finance said in a statement, Yonhap reported.
Such debts are usually sold to raise money to cover short-term financial shortfalls, and thus are generally sold with a maturity of less than three months.
The ministry said the proceeds from the Treasury sales have been used to speed up front-loading of government spending.
The balance of Treasury bills reached 15.9 trillion won at the end of June this year, the ministry said.
Hong Kong set to record first budget deficit in 15 years
Hong Kong is set to record its first budget deficit in 15 years, the city’s finance chief warned Monday, as the business hub reels from the twin shocks of the trade war and seething democracy protests.
In the latest grim assessment for the city, financial secretary Paul Chan told lawmakers that the economy was set to contract 1.3 percent in 2019 hitting the city’s usually bulging coffers, AFP reported.
Chan blamed the 2019-2020 deficit on decreased tax revenues, a slowdown in land sales and recent economic sweeteners he unveiled in a bid to win over the public during a tumultuous year of unrest.
“At the end of the financial year, the SAR government will be in the red,” Chan said, using an abbreviation for the Hong Kong government.
“Hong Kong’s economy is now in extremely difficult times,” he added, as he called for political violence to cease.
The city has been battered by nearly six months of protests.
The increasingly violent rallies have hammered the retail and tourism sectors, with mainland Chinese visitors abandoning the city in droves.
Figures released last week showed mainland arrivals fell a record 46 percent in October, a usually crucial holiday period in China known as ‘Golden Week’.
But the economy has also taken a pummeling from the US-China trade war in a city that serves as a crucial link between the authoritarian mainland and the global markets.
The last time Hong Kong recorded a budget deficit was in the aftermath of a deadly 2003 outbreak of the Sars virus that killed some 300 people.
The city’s budget usually ends the year in an enviable position and successive fat years have built up an impressive cushion.
In March the government said its reserves stood at HK$1,170 trillion ($150 billion) with some critics saying successive leaders have not done enough to alleviate endemic inequality.
Confirmation of a deficit will do little to restore business faith in the hub given Beijing is offering no political solution to the crisis.
On Monday, the city’s aviation regulator gave Hong Kong Airlines five days to find fresh revenue streams or risk seeing its license suspended.
The carrier, which is owned by the struggling mainland conglomerate HNA Group, has been one of the most high profile casualties of plunging visitor numbers and announced last week it was delaying salaries to some staff.
Japanese bonds at turning point as hedge fund fire-sale ends
Japan’s out-of-favor bonds look to be turning the corner. Demand for the beleaguered securities is starting to recover at debt sales after sinking over the previous six months.
The reasons: More attractive (and stable) yield levels, and an end to the wave of foreign selling. Auctions for a combined 2.8 trillion yen ($26 billion) of 10- and 30-year bonds this week may help confirm if this rebound is for real, Bloomberg reported.
JGB holders have had a wild ride over the past few months. Benchmark yields slid to an almost record-low minus 0.295 percent in September before jumping back to as high as minus 0.03 percent in the middle of last month.
The biggest outbreaks of volatility coincided with benchmark bond sales. A disappointing 10-year auction on Oct. 1 saw 10-year bond futures swing in a 97-tick range, the widest in three years. They almost matched that at the following 10-year offering on Nov. 6, with a 93-tick turnaround.
Japan’s 10-year bond sees largest monthly range since February 2016
Life insurers often get the blame for big bond moves in Japan — as they are the largest JGB holders — but the culprits behind the latest stomach-churning moves have been foreign investors.
Quantitative hedge funds, trend-following investors that rely on computer-derived analysis to determine their trading strategies, embarked on a fire-sale of long JGB positions as prices began to slide. Ten-year bond futures — their preferred trading vehicle — have clocked up six straight weeks of net sales.
Foreign investors also began to unwind bullish positions in long-dated interest swaps, causing a blowout in the spread between swap rates quoted in Tokyo and London.
In the last few weeks however, the backdrop is starting to look more positive. Demand unexpectedly rose to the highest since July at a 20-year auction on Nov. 20, and also increased at a 40-year sale six days later.
Yields appear to have plateaued. Those on benchmark 10-year bonds have dropped back below minus 0.1 percent, while 10-year futures have picked up from a seven-month low.
The trend-following fund meltdown also appears to have abated. The level of open interest among investors in bond futures has stabilized, and the underlying securities in the seven-year part of the curve have begun to outperform. What’s more, foreigners appear to be back adding long positions in the swap market.
Which explains why interest is rising in the 2.1 trillion yen sale of 10-year bonds on Tuesday, and 700 billion yen auction of 30-year debt Thursday.
Primary dealers, who are obliged to buy at debt sales, may still be keen to hedge purchases in advance by selling bond futures, which may lead to another round of volatility. At the same time, the auctions may represent a dip-buying opportunity as local investors step in and buy due to the increasingly constructive backdrop.