Trade, Geopolitical Tensions Put Emerging Markets in State of Unease

Ongoing U.S.-China trade negotiations and geopolitical tensions are putting emerging markets in a state of unease as evidenced in the broad-based iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), which both fell as much as 1 percent on Thursday.

EM investors have been feeding off news that U.S. President Donald Trump is open to extending the 90-day trade truce that is set to expire on Friday. The softened stance by President Trump didn’t necessarily surprise investors, but rather confirmed their notions.

However, as opposed to optimistic headlines, investors may be looking for something more tangible.

“Unless the trade war truly turns into an extended truce, the weakening trend may not end quickly,” said Iris Pang, a Greater China economist at ING.

National Economic Council Director Larry Kudlow told CNBC that ongoing negotiations with China are making “fantastic” progress. During the interview, Kudlow said that the world’s second largest economy was willing to make key changes regarding the theft of intellectual property, which has been a major point of contention during the trade talks.

“Last week was fantastic,” Kudlow said. ” “We’re making great headway on nontariff barriers and tariffs regarding various commodities such as soybeans and energy and beef. We have mechanisms with regard to enforcement, which is — I think — unparalleled.”

“The progress has been terrific,” Kudlow added. But “we have to hear from the Chinese side. We have to hear from President Xi Jinping, of course. I think we’re headed for a remarkable, historic deal.”

No Deal with North Korea

The lack of a tangible trade deal as of yet was backed by President Trump leaving a summit with North Korea without a deal to denuclearize. Despite Trump saying that the meeting was on friendly terms and that the U.S. is open to future negotiations, some analysts are surprised that no deal was reached.

Last year’s historic meeting between Trump and North Korean leader Kim Jong-un yielded a peace document that included the denuclearization of North Korea. While on the surface, the broad strokes of the document sound appealing, skepticism still remains as to how the denuclearization process will occur.

“No deal is a surprise, it would be for most experts, especially as they were both all smiley last evening,” said Lim Soo-ho, senior research fellow at South Korea’s Institute for National Security Strategy.

As the trade deadline looms, it could be a bumpy ride for emerging markets. As news regarding trade permeates the markets, the EM space will be one of the more sensitive areas to respond.

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well, but from emerging markets outperforming developed markets.

Conversely, if investors believe that resolutions to the big issues impacting sentiment today are in motion, the Direxion MSCI Developed Over Emerging Markets ETF (NYSEArca: RWDE) provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months.

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