Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) Polls show that the favourable evaluation of the Brazilian government fell to 9%, the lowest reading since 1989.   

2) Ukraine and its creditors have agreed to resume talks 

3) Credit Bank of Moscow’s IPO is the biggest in Russia since February of last year 

4) We are seeing more policy reactions to the MERS impact continues in South Korea 

5) Fitch moved Malaysia’s outlook on its A- rating from negative to stable 

6) Easing continues in China 

In the EM equity space, Malaysia (+1.4), Korea (+0.8), and Hungary (+0.7%) have outperformed over the last week, while China (-5.3%), Turkey (-2.0%), and Brazil (-1.8%) have underperformed.  To put this in better context, MSCI EM fell -0.8% over the past week while MSCI DM fell -1.5%.

In the EM local currency bond space, Mexico (10-year yield -6 bp), Malaysia (-6 bp), and South Africa (-3 bp) have outperformed over the last week, while Ukraine (10-year yield +35 bp), Turkey (+10 bp), and Hungary (+8 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -9 bp over the past week.

In the EM FX space, BRL (+0.6% vs. USD), ILS (+0.6%), and INR (+0.2%) have outperformed over the last week, while EGP (-1.2% vs. USD), COP (-1.2%), and RUB (-1.2%) have underperformed.

1) Polls show that the favourable evaluation of the Brazilian government fell to 9%, the lowest reading since 1989.  The risk here is the popular sentiment becomes so overbearing that the government begins to backtrack on its commitment to lowering inflation and improving the fiscal accounts.  There are no signs of this so far, but the risk is there, especially with Brazil’s Congress pushing back against every move the government tries to make.

2) Ukraine and its creditors have agreed to resume talks.  Negotiations will resume next week with the understanding that they will be done privately.  The two sides have been airing their concerns and differences publicly in recent weeks, marking a more acrimonious turn of events.  Both sides are now sounding more conciliatory.  Press reported that Finance Minister Jaresko would attend the talks, but the Finance Ministry has contradicted this.

3) Credit Bank of Moscow’s IPO is the biggest in Russia since February of last year.  The offering raised RUB13.2 bln ($238 mln).  The move is a further sign that the Russia financial markets are stabilizing post-Crimea conflict, and we expect this to continue.  Of course stable oil prices well off their lows helps.  We note, however, that the ruble has been the clear underperformer in the EM space, falling nearly 5% over the last month.

4) We are seeing more policy reactions to the MERS impact continues in South Korea.  First it was the central bank.  Comments by BOK’s Moon Woon this week argued that further rate cuts are not the right response to the MERS situation.  Now the government is looking to get parliamentary approval for a supplementary budget.  News reports suggest the package could be as large as KRW15 trln ($13.3 bln).  We think markets would welcome this development if it materializes.  Inflation is not an issue in Korea and the trade surplus is at record high (largely due to collapsing imports).

5) Fitch moved Malaysia’s outlook on its A- rating from negative to stable.  Markets breathed a sigh of relief that the country (for now) avoided a downgrade.  Our own sovereign ratings model has Malaysia slipping into BBB+ territory and so we thought a one notch downgrade was justified.  We don't think the story is over just yet, especially with political risk picking up in the country.

6) Easing continues in China.  After cuts to interest rates and reserve requirements last weekend, the PBOC injected some RMB50 bln at the start of the week.  Talk of further investment by local pension funds into equity markets also helped lift stocks, but it was short lived.  The Shanghai Composite fell over 3% during each of the last six sessions aside from one (+5.5%).  Positioning is the name of the game there so volatility will continue and the correction could have a longer to go.

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