Emerging markets sell-off sharply amid trade concerns

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6 August 2019


Emerging market currencies, led most notably by the Chinese yuan, sold-off sharply against the US dollar on Monday as investors grew increasingly anxious that the escalating US-China trade spat could have a significant detrimental impact on the global economy.

urrency traders continued to digest last week’s news that US President Trump would be slapping additional tariffs on another $300 billion worth of Chinese goods, effective September. He also warned that some of the tariffs could go well beyond 25% on some items, claiming that he would ‘tax the hell out of China’ until a trade agreement is reached. In response, China stated that it wouldn’t ‘accept any maximum pressure, threat or blackmailing, and won’t compromise at all on major principle matters’. This is slightly concerning rhetoric that suggests a deal is unlikely to be reached any time soon.

The fastly deteriorating relationship between the two economic superpowers is perceived as not only bad news for the Chinese economy, but also emerging markets in general, particularly those highly dependent on demand from Asia’s largest economy. The Chinese yuan crashed below 7 to the USD yesterday, a psychological level that has not been breached in eleven years. The Indian rupee, Mexican peso and Korean won were the notable losers, all shedding over one percent of their value.

The safe-havens also all gained, while US stocks dropped by the most so far in 2019. The Euro also leapt back to the 1.12 level on bets that the trade conflict would force the Fed to cut interest rates again at its September meeting. We think that this is now highly likely, providing Trump follows through with his latest tariff pledges.

Sterling hits near two-year low versus euro

Sterling was relatively listless yesterday, although it did briefly touch a new two-year low against the euro amid the risk-off mode and uncertainty surrounding Brexit.

With UK economic news firmly taking a back seat to politics, Monday’s better-than-expected services PMI went almost completely under the radar. The ordinarily critical index increased back up to 51.4 in July, comfortably above the anemic 50.2 from a month previous. Yet, with the Bank of England stating that it will not alter policy until it gets a clear idea regarding Brexit, investors are largely overlooking macroeconomic data for now in favour of news out of the UK government.

Today looks set to be a relatively quiet session in terms of economic news, with no major releases across either side of the Atlantic. A speech from Federal Reserve member Bullard may get some attention at around 4pm UK time.