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Contagion fears

Bloomberg
The emerging-market selloff spreads as Indonesia ramps up efforts to defend the rupiah. South Korea seeks to jump-start denuclearization talks with the North. Here are some of the things people in markets are talking about.

Fears of Contagion Hit Emerging Markets

Emerging markets sold off anew Tuesday as South Africa entered a recession and Indonesia’s rupiah joined currencies from Turkey to Argentina in tumbling toward record lows. MSCI Inc.’s index of currencies dropped for the fifth time in six days, closing at the lowest in more than a year. The South African rand led global declines. Turkey’s lira slid on worries the central bank will disappoint investors at its rate meeting next week, while the Argentine peso slumped to a record low and the rupiah sank to its lowest level in two decades even after the central bank intensified its fight to protect it. Asian stocks were set for declines on Wednesday morning after the dollar strengthened and U.S. equities slipped.

Trump’s Tariffs Target China’s Industrial Ambitions

Conflict over China’s industrial policies is at the center of a trade war that’s set to escalate should U.S. President Donald Trump go ahead with planned tariffs on another $200 billion of Chinese goods as soon as this week. The core of those industrial policies is the Made in China 2025 plan to dominate industries from robotics to new-energy vehicles and aerospace. A key element of that blueprint is an unofficial document that’s slipped largely under the radar: the Made in China 2025 Major Technical Roadmap, better known as the Green Book, after the color of its original cover. The official Made in China 2025 plan has no specific targets for Chinese companies to seize domestic and global market share, and even says implementation must be dominated by markets. The Green Book’s 296 pages, on the other hand, are full of goals that would virtually lock foreign companies out of many industrial segments in China and threaten market disruption for businesses across the globe.

Japan’s ETF Exodus Doesn’t Worry BlackRock

Some investors are worried about the market impact when the Bank of Japan decides to wind back an extraordinary, years-long program of support for the country’s stock market, but the world’s largest money manager sees less reason for concern. There will probably be some initial volatility for equities when the Japanese central bank announces a slowdown in purchases of exchange-traded funds, according to the head of BlackRock Inc.’s iShares business in Tokyo. But the move may then be interpreted as a sign of confidence in the economy and market, he said. The BOJ has aimed to spend about 6 trillion yen ($54 billion) a year on ETFs since it doubled its purchase target in 2016, as it stepped up a massive stimulus program. Some have speculated that Governor  Haruhiko Kuroda and his team are tacitly moving away from the program, as monthly purchases of ETFs tumbled in July and August. The bank has denied it.

Jump-Starting the Nuclear Talks

South Korean envoys will seek to revive nuclear talks between the U.S. and North Korea in a high-stakes mission to Pyongyang, as President Trump expresses growing frustration with the negotiations. The five-member delegation sent by South Korean President Moon Jae-in was expected to arrive in the North Korean capital by Wednesday morning. The same team—including National Security Office head Chung Eui-yong and National Intelligence Service chief Suh Hoon—helped broker the historic first meeting between Trump and North Korean leader Kim Jong Un earlier this year. They now face perhaps a more difficult task as disagreements mount over the speed and sequence of efforts to eliminate North Korea’s nuclear arsenal and finally end the Korean War.

Indonesia Fights to Defend Currency

Indonesia plans to delay $25 billion of power projects as it seeks to rein in a widening current-account deficit and a selloff in the nation’s currency. The government will delay almost half of the planned 35 gigawatts of electricity projects to ease pressure on imports, Energy and Mineral Resources Minister Ignasius Jonan told reporters in Jakarta on Tuesday. The deferment may help reduce imports of about $8 billion to $10 billion, he said. President Joko Widodo’s government is intensifying efforts to guard the rupiah. Bank Indonesia has adopted a number of measures to improve liquidity, and authorities said they will clamp down on speculation in the foreign-exchange market to curb volatility, while the government is planning to curb imports of some consumer goods.

What we’ve been reading

This is what caught our eye over the last 24 hours.

And finally, here’s what David’s interested in this morning

Nothing goes up in a straight line. If you’ve been sitting pretty on Indian equities for a while now, you’ve probably done very well. But there’s a chance you’re feeling a bit fidgety. You’re probably looking around at your seatmates wondering what they’re thinking and where they’re looking. JPMorgan’s Head of Equity Research, James Sullivan, who’s now just neutral on India, points out that valuations are close to one standard-deviation expensive and they’re unlikely to expand higher given the other thing that’s also moving up in India: bond yields. Citigroup’s Head of Asia Trading, Mo Aphabai, thinks bonds may start luring money away from Indian equities. If you doubt earnings can continue to improve significantly, cash and fixed income present decent value further down the risk ladder. India’s 5-year bond yield is at 8 percent. The dividend yield on the Sensex is at 1.2 percent.

What are the signs this rotation is gaining traction? Mo advises closely tracking domestic fund flows rather than foreign money moving in and out of the country. He notes that the balance of power in the Indian market has shifted in favor of domestic funds, which I guess also helps explain how stocks at all-time highs can concurrently co-exist with a currency at all-time lows.

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