Edit

Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)
 
(1) The second round of the Brazilian elections is off to an exciting start
(2) The situation in Turkey is becoming tenser as ISIS advances on Kurdish towns in Syria near border
(3) The ruble continues to push through all-time highs
4) The Polish central bank cut rates for the first time since July 2013
5) Hong Kong democracy protests have died down, but the situation remains fluid

Over the last week, Brazil (+11.8%), Hong Kong (+2.2%), and Peru (+2.0%) have outperformed in the EM equity space as measured by MSCI, while Greece (-4.5%), Thailand (-2.4%), and Korea (-1.9%) have underperformed. To put this in better context, MSCI EM rose 2.0% over the past week while MSCI DM rose 0.5%.

In the EM local currency bond space, Brazil (10-year yield -96 bp), Hungary (-40 bp), and Poland (-27 bp) have outperformed over the last week, while Russia (10-year yield +31 bp), Chile (+8 bp), and Korea (+2 bp) have underperformed. To put this in better context, the 10-year UST yield was down -11 bp over the past week. 

In the EM FX space, BRL (+4.3% vs. USD), ZAR (+1.3% vs. USD), and HUF (+1.3% vs. EUR) have outperformed over the last week, while ILS (-1.2% vs. USD), RUB (-1.1% vs. USD), and COP (-1.0% vs. USD) have underperformed.

(1) The second round of the Brazilian elections is off to an exciting start. Marina Silva’s party sided against the PT, though not wholeheartedly in favour of Aecio. Still, this is undoubtedly a positive development for markets. One of the key challenges for observers is that the polls have lost much of their credibility, so we are now all somewhat flying blind. The next important events will be the debates (the first one will be on October 16), as well as seeing how the corruption allegations against the PT and its coalition parties play out. Also, another terrible inflation print (6.75% y/y in September) could only do harm to Dilma.

(2) The situation in Turkey is becoming tenser as ISIS advances on Kurdish towns in Syria near the border. The focus now is on the town of Kobani, which seems to be about to fall into the hands of ISIS. Kurds in Turkey have been protesting the government’s inaction, and recent clashes with the police left twelve people dead. There were also protests in many European cities. One of the (many) subtexts here is that President Erdogan may need the support of the Kurds ahead of the parliamentary elections next year, and this standoff will be a severe blow to the peace process between the government and the Kurdish PKK party. What’s at stake is that in order to consolidate more executive power in the presidency, Erdogan needs to gain a large enough majority in the parliament to make a constitutional change.

(3) The ruble continues to push through all-time lows. The central bank has been intervening the last couple of days. It had reserves of $454.7 bln as of October 3, down $2.1 bln from the previous week. Reserves are also down from $510 bln at the start of the year and from the 2013 peak around $537 bln. With oil prices making new lows for the cycle, all the ducks seem lined up for a weaker ruble. Russia is getting the double whammy EM sentiment getting worse and capital outflows/lack of capital inflows due to sanctions on Russia. We think the ruble could continue weakening well into 2015. The central bank has not hiked rates since July, but it may be forced to soon. Next meeting is October 31.

4) The Polish central bank cut rates for the first time since July 2013. It moved a bigger than expected 50 bp to 2.0%. With deflation risks still strong, we think there is scope for more easing. Governor Belka said the bank wanted to front load easing, and so we may see another move at the November 5 or December 3 meetings. We do not think this is a “one and done” move given the headwind risks from Germany (and the Eurozone) as well as from Russia sanctions.

5) Hong Kong democracy protests have died down, but the situation remains fluid. The Hong Kong government suspended formal talks with the pro-democracy protestors after student leaders called for more demonstrations. The move by the protestors seems one of desperation, as their ranks appear to be thinning as the impasse drags on. Press reports suggest the number of demonstrators has fallen into the hundreds from a peak near 200,000.

Emerging Markets: What has Changed Emerging Markets:  What has Changed Reviewed by Marc Chandler on October 09, 2014 Rating: 5
Powered by Blogger.