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  • Emerging Markets Debt Daily

    China Tariffs – Neverending Story?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 02, 2019

    U.S. decision to impose a 10% tariff on the remaining USD300B of Chinese imports roiled markets. Russia was additionally hurt by the second leg of U.S. sanctions.

    President Trump’s unexpected decision to impose a 10% tariff on the remaining USD300B of Chinese goods sent risky assets into a tailspin
    . The consensus view is that the new tariff will deduct at least 30bps from China’s real gross domestic product (GDP) growth over the next twelve months (provided tariffs are to remain in place—President Trump can cancel them at any time). This means that authorities might open the stimulus spigot a little bit wider in the coming weeks. The focus now shifts to China’s response—either in the form of concessions or retaliatory measures that might affect rare earth metals and U.S. agricultural goods. A big concern outside of China is the tariff’s second-round impact on Europe’s growth (through trade channels).

    Russian assets are under additional pressure this morning following President Trump’s decision to impose the second leg of sanctions. These are so called “chemical” sanctions, related to Russia’s alleged use of chemical weapons in the 2018 attack on a former intelligence officer in the UK. Full details are not yet out, so there is uncertainty regarding the treatment of Russia’s new domestic bonds (OFZs). Other aspects—such as the prohibition of loans from U.S. banks to the Russian government or assistance from international financial institutions—are less important right now because Russia runs sizable budget surpluses and does not require such funding.   

    A strong jobs report in the U.S. was pretty much ignored by the market due to concerns about escalating trade tensions. Non-farm payrolls remained robust at 164K—in line with expectations. The rate of unemployment edged higher to 3.7%, but the participation rate also went up. Average hourly earnings rebounded slightly to 3.2% year-on-year. The report gave more credence to the U.S. Federal Reserve’s (Fed's) dissenters, like the Boston Fed’s President Eric Rosengren, who voted against this week’s rate cut.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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