Oil looms over EMs as no end in sight for US-China trade row

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Oil prices are fast becoming a catalyst for emerging markets. Last week’s slide in crude was partly behind the weakness in the Russian rouble, Mexican peso and Malaysian ringgit, according to Societe Generale SA. With oil wallowing in a bear market, Saudi Arabia expressed the need for oil producers to cut 1mn barrels a day from October levels and announced fewer shipments from next month, as Opec and its allies began laying the groundwork to reduce oil supply in 2019. “Oil-importing emerging economies’ currencies would likely react negatively to a cut in Opec output given Iranian oil exports are already likely to wane over time under the impact of US sanctions,” said Mansoor Mohi-uddin, the Singapore-based head of foreign-exchange strategy at NatWest Markets. “In contrast, if oil prices fall it will benefit the currencies of major oil-importing emerging markets including the Indian rupee and Turkish lira.”


The outlook for oil, a key source of revenue for Russia and Saudi Arabia, is adding a fresh twist for a market already obsessed with Federal Reserve tightening and the US-China trade dispute. The prospect of any breakthrough on trade took a knock on Friday when White House trade adviser Peter Navarro warned Wall Street not to pressure President Donald Trump into a quick deal. On the domestic front, there’s a chance Mexico’s central bank will increase interest rates on Thursday after the peso clocked up its sixth weekly loss. While policy makers in the Philippines may also hike rates, their counterparts in Thailand and Indonesia will likely leave their benchmark rates unchanged. The rouble, the only emerging-market currency to rise yesterday, led a decline last week after the Fed signalled it will keep raising rates, making tomorrow’s release of US consumer-price data the next pointer for monetary policy.


Oil matters: Oil futures climbed yesterday after a record run of losses as Saudi Arabia said it will reduce crude sales in December and speculation rose that Opec and its allies will cut output next year. Futures tumbled into a bear market on Thursday, and Brent crude dipped below $70 a barrel on Friday for the first time in more than six months, as fears of a production crunch and $100-a-barrel crude through the summer morphed into talk of a glut. Adipec conference started yesterday in Abu Dhabi, with hundreds of oil executives and government officials attending, following Opec/non-Opec committee meetings over the weekend. Opec releases its monthly report today, the same day as IEA’s World Energy Outlook 2018. IEA follows up tomorrow with its monthly Oil Market Report.


Mexican move: Banks including JPMorgan Chase & Co expect policymakers to boost the key rate from a nine-year high of 7.75%. The peso, stocks and bonds have come under pressure since incoming President Andrews Manuel Lopez Obrador scrapped a partially built $13bn airport and a lawmaker from his party unexpectedly proposed abolishing some bank commissions. Lopez Obrador later assured investors he won’t make changes to banking laws, sparking a rebound in Mexican assets. The peso’s “high carry and good value” will be anchors in the long run “as the incoming administration’s bumpy takeoff continues,” Goldman Sachs Group Inc strategists including New York-based Zach Pandl wrote in a November 9 report. “That carry is likely to move higher” with an increased likelihood of a rate hike”.


Philippines in focus: Bangko Sentral ng Pilipinas, which meets on Thursday, last raised the policy rate in September, taking the increase to 150 basis points in just over four months. Inflation in the Philippines remains at an almost decade high. Eleven of 18 economists surveyed by Bloomberg predict a 25bp rate increase. Most economists expect policymakers in Indonesia and Thailand to hold rates this week. The Philippine peso was Asia’s best performer in October and has extended those gains in November, while Indonesia’s currency has taken that crown so far for this month. Bank Indonesia has hiked 150 basis points since mid-May. It kept its benchmark rate unchanged at the October meeting.


Brazil central bank chief: Brazil’s President-elect Jair Bolsonaro may name more cabinet members, and possibly a new central bank chief. Investors are calling for current head Ilan Goldfajn to stay in the job. Efforts at fiscal overhaul or the formal granting of autonomy to the central bank this year, earlier than expected, may also drive prices. The real slipped 0.2% this month through Friday, the worst performer among peers after Russia’s rouble. Nigeria’s bond roadshow: Nigeria may tap the Eurobond market for the second time this year. Africa’s biggest oil producer started a three-day roadshow with fixed-income investors yesterday. The nation’s Senate last month approved President Muhammadu Buhari’s request to issue $2.8bn of external debt.

Sources and photo-credits: Bloomberg, Gulf Times