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  • Emerging Markets Debt Daily

    Tariff Hike on China—Now What?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 10, 2019

    The continuation of the U.S.-China talks had a calming effect on the market despite the U.S.’s tariff hike on China. South Africa’s election results point to potential policy risks going forward.

    The markets are doing well despite the U.S. raising its tariffs on USD200B of Chinese imports from 15% to 25%. The reason is that the negotiations are not dead
    and the two sides continue talking. One question mentioned frequently this morning is whether (or rather when) China will retaliate. There are also concerns that the new tariffs may weigh on China’s growth, which has just started to show signs of stabilization. So, China’s domestic policy response—both the continuation of “drip” stimulus and any other potential measures—is back on the front-burner (together with concerns about the renminbi’s potential weakness and its impact on emerging markets currencies). Emerging markets are not the only ones who watch the U.S.-China dispute rather intently. The eurozone is another interested observer, given the region’s export exposure to China.

    South Africa’s elections results are now official, and they show a continuing decline in the African National Congress’s voting share. The party was able to get a majority of the votes (around 57%). However, the radical Economic Freedom Fighters (EFF) party showed the largest gain, with its share raising to 10% from 6.4% in 2014. While the electorate continues to support President Cyril Ramaphosa and the ruling party, we are concerned that the EFF’s demands will have a stronger impact on the reform agenda, most likely generating unnecessary headline noise.

    It was a bit tough to choose the macro horror story of the day (several contenders). But since we bemoaned Turkey’s wasting its international reserves on futile currency interventions (which continued overnight with gusto) on more than one occasion, we decided that today is Mexico’s turn. The country’s industrial production contracted by 2.6% year-on-year in March—the lowest point since the global financial crisis (see chart below). The outlook is bleak—in part due to ongoing cuts in public investments—but we do not expect the central bank to lend a helping hand (in the form of rate cuts) as inflation risks remain firmly to the upside and the central bank of Mexico still cares about its reputation.

    Chart at a Glance

    Mexico Industrial Production

    Source: Bloomberg LP


    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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