What Has Changed in EM

  • Higher US tariffs on $200 bln of Chinese goods went into effect today at midnight
  • North Korea conducted two short-range ballistic missile tests
  • Bank Negara Malaysia cut rates 25 bp to 3.0%, as expected
  • Thailand finally released official results from the March election
  • Turkish election board nullified the results of the Istanbul mayoral vote
  • State-owned Turkish banks were reportedly selling USD for TRY during Asian hours.
  • The ANC is headed to a solid victory in South Africa
  • Argentina President Macri is attempting to isolate rival Cristina Fernandez Kirchner ahead of October elections

Higher US tariffs on $200 bln of Chinese goods went into effect today at midnight. This came hours after chief China negotiator Liu arrived in Washington and went straight into talks with chief US negotiator Lighthizer. The 25% tariffs will also be extended to another $325 bln of Chinese goods, but no further details have emerged.   China confirmed that it will be forced to retaliate against the US. We do not believe President Xi will give in to US threats, as it would be taken as a sign of weakness domestically.

North Korea conducted two short-range ballistic missile tests. This comes days after Pyongyang conducted live-fire military drills. Trump downplayed the tests, noting “They’re smaller missiles” but adding that “Nobody’s happy about it.” The launches came even as top US envoy Stephen Biegun was in Seoul to discuss restarting talks with Pyongyang.

Bank Negara Malaysia cut rates 25 bp to 3.0%, as expected. The central bank noted that “There are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.” The policy rate troughed at 2.0% during the financial crisis, and so it has room to cut rates again. Next policy meeting is July 9.

Thailand finally released official results from the March election. The Election Commission allocated 150 so-called party-list seats and are assigned using the proportional vote shares. After the March 24 election, opposition Pheu Thai said it had formed a seven-member coalition that would have 255 seats in the 500-seat lower house. Based on the official results, that number fell to 245.

Turkish election board nullified the results of the Istanbul mayoral vote. A new election will be held June 23. This news adds to the sense of heightened political uncertainty. AKP will likely do whatever it takes to win, including potential for fraud and voter suppression. If so, this will keep downward pressure on Turkish assets.

State-owned Turkish banks were reportedly selling USD for TRY during Asian hours. This stealth intervention was done during thin markets to get the biggest bang for the buck. However, like stealth tightening done earlier this week, this tactic is doomed to failure. Until something fundamentally changes for the better, Turkish assets will remain under pressure. We’d also note that Turkey has very limited foreign reserves and cannot intervene on a regular basis.

The ANC is headed to a solid victory in South Africa. With 81% of the votes counted, the ANC has a 57% share of the vote, down from 62% in the 2014 national election but up from the 54% in the 2016 municipal elections. Furthermore, it is at the high end of poll estimates that ranged anywhere from 51-61%. This is the best outcome for South Africa, but we remain very negative as Ramaphosa must still deal with deep structural issues that are hindering the nation.

Argentina President Macri is attempting to isolate rival Cristina Fernandez Kirchner ahead of October elections. Macri invited opposition lawmakers to help create a 10-point plan that clearly contrasts with the policies of former Presidents Kirchner and her husband Nestor. The plan’s main points include balanced budgets, central bank independence, and a credible statistics agency. It also includes plans for long-term tax and labor reforms.