Warnings Won't Go Away as Trump-Xi Optimism Sparks Risk Rally

Warnings Won't Go Away as Trump-Xi Optimism Sparks Risk Rally

The prospect of a Trump-Xi meeting in Osaka next week lifted the mood across an emerging-market universe already confident the Federal Reserve will show the requisite dovishness at the end of its two-day meeting today. But markets, today at least, don’t appear too worried.

Disappointment Risk

It still wouldn’t be too much of a stretch to envisage a Trump-Xi meeting that produces nothing beyond an agreement to keep talking, in much the same vein as the Buenos Aires event. So a lot of commentators are warning today that markets may be setting themselves up for disappointment, as Hooyeon Kim, a Bloomberg markets reporter in Seoul, showed today.

Won Rally

As it was, the Korean won led the charge in the foreign-exchange space, registering one of its biggest rallies this year. The Taiwan dollar and Thai baht weren’t far behind. Yield spreads on sovereign dollar bonds narrowed an average of 2 basis points versus Treasuries, putting JPMorgan Chase & Co.’s EMBI+ Index within touching distance of closing below 400 basis points for the first time since April.

History’s Warning

Korea and Taiwan also headed the gains among stock markets, with the MSCI Index back up to its highest level in more than a week and poised to break above its 50-day moving average. But for anyone assuming that softer Fed policy virtually guarantees more stock gains among the developing economies, there’s some sobering history to consider. Tomoko Yamazaki, Bloomberg’s emerging-market team leader in Singapore, reported today that the two sustained Fed easing cycles of the past 20 years didn’t coincide with gains for the MSCI Index. The simple takeaway is that markets care more about the underlying fundamentals, supporting the view that any recovery right now may be short-lived.

Lira Loses Out

The lira spoiled the party, weakening as much as 1.5% after people familiar with the matter said the U.S. is weighing three sanctions packages to punish Turkey over its planned missile purchases from Russia. It can hardly have been much of a surprise to traders -- and the lira was recovering a little at the time of writing -- but the initial reaction underscored the vulnerability of a market with very little going for it at the moment. The central bank appears to be preparing the ground for rate cuts some analysts say may be premature, there’s a contentious municipal election re-run in Istanbul this weekend and the country just had its debt profile lowered further into junk by Moody’s. Little wonder there are next-to-no foreign debt sales from Turkey these days, as Selcuk Gokoluk, Bloomberg’s emerging-market reporter in London, showed yesterday.

Brazil Easing

The Fed isn’t the only central-bank show in town today. Brazilian policy makers are also due to meet, with most economists expecting no change to the country’s already-record low 6.5% Selic rate. However, the view that Senhor Campos Neto and his colleagues will cut the rate further this year is rapidly gaining traction, as Davison Santana, an emerging-markets strategist at Bloomberg in Sao Paulo, wrote yesterday. Swap markets are pricing in almost 70 basis points of cuts in the second half. Further evidence tonight that such easing is in prospect in Latin America’s biggest economy might provide an additional tailwind for the Ibovespa, which jumped 1.8% yesterday to edge back above the 99,000 mark.


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