Warning Signs Flash for HSBC, Merrill in Emerging Market Rally
The backlash to the world’s most-popular trade is underway — the emerging market rally has now gone too far, according to HSBC Holdings Plc and Bank of America Merrill Lynch. A combination of potentially hawkish Federal Reserve surprises and already stretched performance has convinced HSBC strategists including Max Kettner to turn cautious on emerging-market assets, while Merrill Lynch strategist Ralf Preusser thinks developing-nation bonds are vulnerable to positive U.S. data releases. “Cross-asset emerging market performance looks stretched, particularly for EM local currency debt and EM equities,” wrote Kettner and team in a note Monday. “Might now be the time to reduce EM exposure in portfolios tactically, that is over three months? We think it is indeed time for a breather.” Emerging-market assets have rebounded since the end of last year, as a dovish turn from many of the world’s central banks and growing optimism about U.S.-China trade talks boosted risk assets. The MSCI Emerging Market Index of shares is up over 7 percent year-to-date and its currency equivalent has risen 1.3 percent. The Bloomberg Barclays EM USD Aggregate Total Return Index has gained about 3.5 percent in the period. For HSBC, the asset class’s performance now looks stretched if history is any guide. It also seems plausible that any Fed surprises in the coming months will be to the hawkish side, which would pressure EM, the strategists wrote. Even with a quick U.S.-China trade resolution, relative upside would be constrained, they added.
ECB Heavy Hitters Lay Groundwork for Response to Slowdown
Some of the European Central Bank’s heavy hitters are laying the groundwork for action. The top economist and the market chief at the Frankfurt-based institution have already signaled they’re discussing options in case the current euro-area slowdown worsens, and the vice president echoed that on Tuesday. There have been similar hints from Francois Villeroy de Galhau, who is the Bank of France Governor and a potential contender to be next ECB president. The backdrop is a recession in Italy, stagnation in Germany, and a sharply changed outlook for the 19-nation euro area. Investors have also responded, with the euro near its weakest since mid-2017 and the yield on 10-year German bunds threatening to go negative for the first time since 2016. “It’s clear the ECB is nervous,’’ Steen Jakobson, chief economist at Saxo Bank, said on Bloomberg Television. After saying last year that the “policy of support had worked and Europe had turned a corner, here we are and they are almost in a panic mode in terms of what they need to do.” While the ECB’s current language — that interest rates won’t rise at least through the summer of 2019 — leaves open the chance of a hike later in the year, the likelihood has very much faded. That’s the message now coming from policy makers, and traders in money markets aren’t pricing the first 10-basis-point hike until June 2020.
Japan Says U.S. Won’t Hike Car Tariffs During Trade Deal Talks
Japan is sticking to its view that the U.S. won’t apply higher tariffs on imports of Japanese cars and auto parts so long as negotiations toward a trade deal continue, according to Tokyo’s lead negotiator with Washington. The comments from economy minister Toshimitsu Motegi come as policy makers in Japan and Europe fret about the findings of a U.S. Commerce Department report on vehicle imports submitted to Donald Trump on Sunday. Trump has threatened to raise U.S. tariffs on car and auto part imports as high as 25 percent if they are deemed a U.S. security risk. Higher tariffs would wallop Japan’s biggest industry, severely denting the country’s growth prospects. Car and auto part exports made up 20 percent of Japan’s total exports in 2018. Motegi said Tuesday he had previously confirmed with U.S. Trade Representative Robert Lighthizer that Washington wouldn’t apply higher rates amid talks on a trade deal. Prime Minister Shinzo Abe had also confirmed with Trump that existing rates would stay put while negotiations took place, he added. Motegi’s comments echo the response of the European Union to the submission of the report, reminding the U.S. to keep to its word on holding fire while talks continue.
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