Emerging global markets brace for a trade-war blow-out

Bloomberg

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 the outcome of Monday’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 & Co. 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.”
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 Inc. strategists including New York-based Zach Pandl wrote in a July 13 note. 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. Donald Trump raised the stakes on Tuesday by moving forward with plans to impose tariffs on another $200 billion 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. US President Donald J Trump is under pressure to confront his counterpart once and for all after Special Counsel Robert Mueller indicted 12 Russian intelligence officers for hacking offenses 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 ruble gained 0.7 percent last week, among the best-performing developing-nation currencies. The US imposed its toughest sanctions to date in April as punishment for Moscow’s alleged elections meddling and Trump has said he will raise the matter of interference when the two
leaders meet.