June 27, 2019 / 3:29 PM / in 24 days

Emerging market investors stake more on 'benign outcome' to China-U.S. trade talks -IIF

LONDON, June 27 (Reuters) - A sharp rebound in flows to China and other emerging markets could signal investors expect a benign outcome to the trade row between the world’s two largest economies, the Institute of International Finance (IIF) said on Thursday.

U.S. President Donald Trump and Chinese President Xi Jinping will meet on Saturday on the sidelines of the G20 gathering of world leaders, with investors hoping for a lasting truce in the nearly year-long dispute that has led both sides to impose tariffs of up to 25% on hundreds of billions of dollars of goods.

“Recent weeks have seen a sharp rebound in flows, both to China and the rest of EM (emerging markets), which may be a sign that investors are positioned for a benign outcome of China-US trade talks,” Robin Brooks, managing director and chief economist, IIF, said in a research note.

Against a backdrop of rising trade tensions, the pace of flows to emerging markets outside China was remarkably robust in the second quarter, reaching $23 billion, only slightly down from $31 billion in the first quarter, the IIF said.

The flows might have been partly enticed by the dovish shift of central banks in Europe, the U.S. and Japan, reinvigorating the hunt for yield, it added.

“Nonetheless, we believe the outlook for flows to non-China EM remains difficult, given the large amounts of hot money that have already gone to emerging markets in recent years, which we see as having resulted in a positioning overhang, a structural drag on new inflows,” wrote Brooks.

The United States and China agreed to a tentative truce in the dispute ahead of the Osaka meeting, Hong Kong’s South China Morning Post reported, citing sources.

Before leaving the U.S. on Wednesday, Trump said a deal was possible this weekend but he was prepared to impose tariffs on virtually all Chinese imports not already subject to U.S. levies, if the two countries continue to disagree.

China’s underlying trade surplus remained near record highs, the IIF said, according to its own measure, but it warned additional tariffs could tip the balance and lead to yuan depreciation. (Reporting by Tom Arnold; Editing by Alexander Smith)

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