China delivers US, Fed as biggest risk for new markets

(Bloomberg) Investors in new markets are finding out if there is more to worry about in China than just the Evergrande debt crisis.

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Official and private measuring instruments for Chinese manufacturing will be released on Thursday, with expectations they will add signs of sputtering growth. Concerns that the world’s second-largest economy is slowing down have hobbled developing countries’ currencies and equities in recent weeks and erased gains triggered by the US Federal Reserve’s security for a calibrated phasing out of its stimulus measures.

China has now emerged as their biggest risk. While Evergrande has triggered fears of a slowdown in the real estate market, investors are even more concerned that the broader economy is stalled due to viruses and consumer cuts. Some want to diversify into markets that are less dependent on China’s growth, such as India and Egypt.

“The risk of contagion and further downturn in the real estate sector is real,” Goldman Sachs Group strategists, led by London-based Kamakshya Trivedi, wrote in a note last week. “But for the rest of the emerging markets, what matters more is the negative impact on Chinese growth and in the wake of commodity prices, and whether politicians step in to offset these downside risks.”

Stock, Currency Volatility in synchronization as Fed, China’s risk takes hold

This week’s Chinese data will also serve as a barometer of the demand for goods such as oil and copper, which exporting nations from Angola to Peru depend on to drive their own growth.

The Caixin meter for China’s manufacturing activity showed a contraction for August, the first reading below 50 since April 2020. The official measurement of manufacturing has fallen for five consecutive months. Retail, industrial production and investment have all slowed down, confirming the slowdown.

Meanwhile, Evergrande is evolving into a cliffhanger, with another payment to be paid this week as part of $ 669 million in bond yields to be paid at the end of this year. Regardless of the immediate result, it can be messy and take some time to leverage leverage in a slower real estate market, according to Goldman strategists.

China’s economy will now grow at a slower pace than expected in the years through 2023, according to Bank of America Corp. It lowered its forecast for 2022 to 5.3% from an earlier estimate of 6.2%.

Contained infection

Some investors are trying to look past the Evergrande crisis with growing optimism the Chinese government will step in at some point and prevent broader contagion.

“The scale of the Evergrande fallout is central, but Chinese state aid for its operations as opposed to its listed securities should dampen some of the worst-case scenarios,” said Hasnain Malik, Dubai-based head of research at Tellimer Research.

Concerns over China come after a respite from the Fed, which said it was close to reducing the stimulus but kept the door open to extend it as needed. Chairman Jerome Powell also stressed that the process would not give a direct signal about the timing of lifting rates.

“The announcement from the Fed was one of a dull policy and ongoing market support if necessary, which is positive for risk values,” said Todd Schubert, head of interest rate research at Bank of Singapore Ltd.

Diversification games

Those who believe that China’s problems will not mean the downfall of new markets as a whole are betting that it leaves room for some smaller nations to start doing better.

Emerging economies with high real interest rates are better prepared for a world where the United States is tightening its policies and China is slowing down, according to Tellimers Malik. Markets including Egypt, Ghana, Indonesia, Vietnam and the United Arab Emirates look promising, he said.

The Bank of Singapore, while still buying BB and BBB names in China’s real estate sector, is looking for great deals in Indonesia and India in case an infectious sale is realized.

“Indonesia and India are the largest Asian credits left as opportunities for diversification away from China,” Schubert said.

These are the events and data you need to keep an eye on this week:

  • China’s official and Caixin PMIs for September are likely to “rise from last month’s disappointing readings,” Bloomberg Economics said in a report

    • Still, the nation’s economic recovery will continue to be pressured by risks from small outbreaks of Covid-19, tighter rules on sectors from technology to real estate and the uncertainty surrounding the Evergrande debt crisis

  • Colombia is set to join its Latin American peers with its first rate hike in five years on Thursday after inflation accelerated beyond its August target

  • Banco de Mexico is likely to raise interest rates for a third consecutive meeting on Thursday after mid-month inflation jumped

  • In Brazil, Tuesday’s minutes from last week’s central bank meeting will be examined after decision-makers promised another percentage increase next month to contain price shocks. The central bank has launched the world’s most aggressive austerity cycle this year, increasing borrowing costs by 425 basis points since March, with only a limited impact on prices

  • The Bank of Thailand’s interest rate decision on Wednesday will be followed closely after the previous meeting in August had a split vote in which disagreers called for a cut as risks to growth persist

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