Global markets endured a significant downturn by end June, with Emerging and Asian stock markets tumbling to ten-month and nine-month lows respectively. Investors have retreated from risk assets following the escalating tit-for-tat trade war between the US and China, lifting safe-haven US Treasury Yields.
China’s yuan weakened beyond the psychologically key 6.6 per dollar level, stoking concerns that it is fast becoming a weapon in the US trade war. However, China’s Central Bank later pledged that it would keep the currency stable, after nearing ten-month lows. Other emerging market currencies were also affected by the combination of escalating tensions and a rising dollar, with the Indian rupee and Hungarian forint dropping to record lows.
The Federal Reserve raised interest rates, as expected, and signalled two more hikes this year – citing higher inflation. As a result, rising US Treasury Yields have led to the flattest yield curve in nearly 11-years. Meanwhile, the ECB announced that it would “call time” on its three-year bond buying programme by the end of 2018, at a meeting of the bank’s governing council in Latvia. The ECB President Mario Draghi cited healthy growth, managed inflation and low unemployment as key factors.
Net portfolio flows to emerging markets were once again negative in June, with $8bn in non-resident portfolio outflows, according to the Institute of International Finance (IIF). Analysts noted that unlike other recent bouts of EM outflows, this recent downturn has featured outflows from China, likely prompted by escalating U.S.- China trade disputes and the sharp renminbi depreciation. June caps off the weakest quarter for emerging markets since the end of 2016. However, analysts also noted that it would not be surprising to see a relief rally and some rebalancing if the trade narrative improves and/or the U.S. dollar heads lower.
Brent crude oil prices reached a high of $79.44 a barrel on the 29th of June, as supply concerns over US sanctions on Iran, an OPEC agreement to raise output and anticipated increases in demand have driven prices higher. Prices have moved in a $74.00-$80.00 range this month.
Source: Frontier Blog