*By Christophe Barraud, Chief Economist & Strategist at Market Securities (https://twitter.com/C_Barraud)
According to TrackInsight data, investors withdrew more than $3.5Bn from “Emerging Stocks” ETFs last week. The trend has gained traction with 10th consecutive daily outflows.
In a context where trade tensions between U.S. and China have risen and global growth prospects have weakened, EM stocks are on course for their worst month since October. In addition, EM currencies have erased gains YTD with the CNH hitting its lowest level since November 2018.
Latest headlines suggest that a deal between the U.S. and China seems out of reach by the next G20 (June, 28-29) and could be even delayed post U.S. presidential elections (Nov. 2020) as tensions between the two nations skyrocketed. Even if the Commerce Department on Monday granted a 90-day relief for certain U.S. broadband companies and wireless customers using Huawei, a Bloomberg report revealed that “the U.S. is considering cutting off the flow of vital American technology to as many as five Chinese companies including Hangzhou Hikvision Digital Technology Co., widening the dragnet beyond Huawei to include world leaders in video surveillance”.
On the other hand, the South China Morning Post highlighted that “Chinese President Xi Jinping has called for the nation to embark on a new Long March and “start all over again”, in the most dramatic sign to date that Beijing has given up hope of reaching a trade deal with the United States in the near term”. This headline came after Chinese media reported last week that CCTV 6, the movie channel of China’s main state television broadcaster, played three anti-American movies for three days in a row. All in all, it confirmed my view that since Vice Premier Liu He came back from Washington, China changed its stance by:
1/ Giving three red-lines including the removal of tariffs
2/ Taking an offensive approach in Chinese public media and social networks
3/ Adopting a stronger nationalist tone
Meanwhile, global growth prospects keep weakening with the OECD cutting its global growth forecast for 2019 to 3.2% (down from 3.3% prior). In addition, recent economic figures also confirmed that global trade growth will remain a drag. As a matter of fact, South Korea exports (during the first 20 days of May) declined 11.7% YoY, pointing to a potential sixth-straight full-month drop.
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