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According to Piotr Matys, EM FX strategist at Rabobank, this week’s another round of trade negotiations between the US and China will set the tone for emerging markets.

Key Quotes

“Treasury Secretary Mnuchin and Trade Representative Lighthizer will be in Beijing for a high level of talks with China represented by Vice Premier Liu He.”

“Investors who recently increased their exposure to risky assets due to attractive valuations, high yields and the prospects of a prolonged pause in Fed’s tightening cycle will be looking for constructive comments regarding trade.”

“Even if the US and China reach a last minute consensus ahead of the March 2 deadline that would prevent the US tariffs on China’s exports from rising to 25% from 10%, we remain sceptical that the trade conflict will end. An agreement, if there is any, would have to be accompanied by a reinforcement mechanism that would allow the US to apply pleasure on China to comply. This in turn would mean that China would be in a very uncomfortable position and sooner or later tension would likely resurface again.”

“To our mind recent improvement in sentiment towards risky assets is unlikely to prove sustainable over the course of the year. The risk that already tense relationship between the US and China may deteriorate further is still relatively high. Mounting signals of a synchronised global slowdown do not bode well for emerging markets over the mid-term horizon.”