With the US economy doing so well, Trump is further encouraged to pursue better trade deals with hard tactics. This is not helping alleviate the uncertainties popping up again in Emerging Markets.

NAFTA 2.0 Surprise

In last week’s commentary, we wrote: “The window of opportunity to hammer out a deal is closing, and despite political posturing, game theory suggests that Trump will agree to a new NAFTA deal before the end of 2018.” We were vindicated a day later when the Trump Administration nailed an agreement with Mexico.

One down, another to go. We remain optimistic about a positive conclusion to the NAFTA renegotiations, despite the visible animosity that Trump displays towards Trudeau. The agreement with Mexico is unlikely to be passed by Congress without Canada. Far too many states are negatively impacted by a trade deal that excludes Canada.

Emerging Market Contagion

At the risk of repeating ourselves, the Fed’s interest rate hikes and subsequent US dollar strength will hurt Emerging Market economies that depend on dollar funding. The Fed will likely announce its eighth hike in September, and we will likely see more of the same weakness from Emerging Markets. Turkey and Argentina were the first victims, and the pressure is building in Indonesia and South Africa.

Argentine bonds took another plunge as the central bank raised rates to 60% to stem capital flight. The currency continued to weaken despite the government’s efforts to intervene by selling down the USD reserves it obtained from the IMF. On 11 June 2018, we wrote: “Floating the exchange rate is the right thing to do because fx markets eventually force the devaluation and rates end up much higher than they would have otherwise. Argentina’s 7-day repo reference rate has been sitting at 40% since early may, and the peso keeps depreciating. Will the $50 billion IMF loan help? We are not so sure.”

Turkey is taking ill-advised measures to counter capital outflow. Turkey raised taxes on foreign currency deposits and lowered them on the lira-denominated ones. This policy is dangerous in the long-term because the problem is not the private sector’s foreign currency assets; the problem is the private sector’s foreign currency debt. The logic is the same as Argentina’s Central Bank dumping its foreign currency reserves to defend its currency. The market’s reaction is to assess an even lower value to the local currency as net foreign liabilities increase to even more unsustainable levels.

Turkey’s lira will weaken further, and we may very well witness default on foreign debt. There is no easy fix for Turkey.

For Emerging Market exposure, stick to countries with low levels of external debt. If the country does not have a free-floating exchange rate, then high levels foreign reserves are advised in this environment.

The Brexit Endgame

Europe is reaching a difficult point. Trump is overhauling trade relations, the populist Italian government is threatening to oppose the EU’s budget, the Eurozone banking system is exposed to a potential Turkish default, and the deadline for Brexit is fast approaching. Is it any surprise that Barnier was quoted last week to say that the EU was prepared to offer the UK an “unprecedented partnership” to counter fears of a no-deal scenario. GBP jumped on Barnier’s words, but it is going to take a lot more to convince traders that this is a turning point.

The Week Ahead

We remain watchful for a contagion emanating from Turkey and are increasingly looking at the Eurozone for contagion risk.


The US is closed for Labor Day. Turkey and Indonesia report CPI. Turkey, Ireland, Russia, Sweden, Norway, Netherlands, Spain, Switzerland, Italy, France, Germany, Greece, India, Brazil, Mexico, the UK, and the Eurozone report Manufacturing PMI. Japan reports vehicle sales. Greece reports Q2 GDP. South Korea reports GDP and CPI. Brazil reports Capacity Utilization, Trade Balance, Exports, and Imports. Australia reports Balance of Payments Current Account Balance. Argentina will disclose its monthly government tax revenues.


The US and Canada report Manufacturing PMI. The US reports on Construction Spending, ISM Manufacturing, ISM Employment, ISM Prices Paid, and ISM New Orders. Japan, Singapore, China, and Hong Kong report PMI figures. Mexico reports International Reserves. Argentina reports Construction Activity and Industrial Production. The Phillippines reports CPI and Unemployment Rate. Australia reports GDP. Egypt, Saudi Arabia, and the UAE report PMI figures. Spain’s will release unemployment figures. Switzerland reports CPI. The Eurozone reports PPI. The UK reports Markit/CIPS Construction PMI. South Africa releases GDP figures. Ireland reports its Industrial Production and Unemployment Rate. Brazil reports its Industrial Production.


The US reports its Trade Balance and MBA Mortgage Applications. Canada reports on International Merchandise Trade and Labor Productivity. The Bank of Canada is also due to announce its rate decision. Mexico releases the latest Consumer Confidence Index. Malaysia reports Trade Balance figure, and it is expected to keep the Overnight Policy Rate at 3.25%. Germany, France, Italy, Spain, Ireland, India, the UK, the Eurozone, Brazil, and Russia report Services PMI and Composite PMI. Taiwan reports CPI and Foreign Reserves. Russia reports CPI.


The US reports Services PMI, Composite PMI, ISM Non-Manufacturing Index, Factory Orders, Durable Goods Orders, Capital Goods Orders, ADP Employment figures, Initial Jobless Claims, and Continuing Claims. Canada reports on Building Permits. The Netherlands reports CPI. Switzerland reports GDP. Germany’s Factory Orders are due. Malaysia publishes its Foreign Reserves. Sweden’s Riksbank is expected to keep its interest rate at -0.5%. South Africa will report on its Current Account Balance, which is expected to be in deficit again for Q2. Russia reports on Gold and FX Reserves. Mexico reports Gross Fixed Investment. Japan reports on Household Spending and Labor Cash Earnings. Australia reports Home Loan figures.


The US reports the Employment figures, Private and Nonfarm Payrolls. Canada reports the Employment figures. Mexico publishes CPI numbers for August. Germany reports its Industrial Production, Labor Costs, Trade Balance, and Current Account Balance. Norway reports on Industrial Production. South Africa reports Official Reserves figures. Malaysia reports Industrial Production figures. Switzerland reports its Unemployment Rate. France reports its Trade Balance, Budget Balance, Industrial Production, and Manufacturing Production. Spain reports its Industrial Output and Production. The UK’s Halifax House Price Index is updated with the latest figures. Sweden announces its Budget Balance. Thailand publishes its Foreign Reserves. Italy publishes Retail Sales. Taiwan reports its Trade Balance. The Eurozone reports GDP figures.



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