Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

• President Trump threatened US tariffs on $500 mln of Chinese imports.
• Malaysia Finance Minister Lim Guan Eng cut his growth forecast for this year to 5%.
• Pakistan central bank hiked rates 100 bp over the weekend and then devalued the rupee again. 
• Israeli Knesset passed a controversial bill that defines Israel as “the national home of the Jewish people."
• Brazil presidential candidate Geraldo Alckmin has reportedly won backing from some key centrist parties.
• The last round of competitive oil auctions in Mexico has been delayed

In the EM equity space as measured by MSCI, Brazil (+5.8), Turkey (+4.9%), and Thailand (+2.9%) have outperformed this week, while Russia (-6.8%), Egypt (-4.3%), and China (-1.5%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM rose 0.3%. 

In the EM local currency bond space, Turkey (10-year yield -76 bp), Brazil (-23 bp), and Mexico (-8 bp) have outperformed this week, while Indonesia (10-year yield +39 bp), Pakistan (+23 bp), and Russia (+20 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 4 bp to 2.88%. 

In the EM FX space, BRL (+1.9% vs. USD), TRY (+0.8% vs. USD), and ILS (+0.3% vs. USD) have outperformed this week, while PKR (-5.3% vs. USD), RUB (-1.7% vs. USD), and ARS (-1.5% vs. USD) have underperformed.  To put this in better context, MSCI EM FX fell -0.6% this week. 

President Trump threatened US tariffs on $500 mln of Chinese imports.  This figure pretty much accounts for all Chinese imports into the US last year.  Tensions remain high, as China officials accused the US of making false accusations.  Many now fear that China will use the yuan exchange rate as a weapon in the trade war, but we downplay that notion. 

Malaysia Finance Minister Lim Guan Eng cut his growth forecast for this year to 5%.  He noted that “If the global economy slows, as a trading nation, definitely Malaysia will be impacted.”  This compares to the central bank’s 5.5-6.0% forecast. 

Pakistan central bank hiked rates 100 bp over the weekend and then devalued the rupee again.  The bank has also been making it harder for importers to access dollars via red tape and regulations.  Political risk has risen too, with the recent 10-year prison sentence for former Prime Minister Sharif seen as an attempt to stifle all dissent ahead of the July 25 elections.   

Israeli Knesset passed a controversial bill that defines Israel as “the national home of the Jewish people.”  The bill also downgrades the status of Arabic from an official language to one with “special status.”  The bill was approved 62-55 with 2 abstentions.  Critics are worried that the move will inflame the simmering Arab-Israel tensions in the nation.

Brazil presidential candidate Geraldo Alckmin has reportedly won backing from some key centrist parties.  Several parties of the center-right group known as “centrao” have reportedly agreed to back former Sao Paulo Governor Alckmin for president.  Among other things, this backing will give Alckmin greater television time. 

The last round of competitive oil auctions in Mexico have been delayed.  Originally planned by outgoing President Pena Nieto for September 27 and October 31, the auctions have been postponed to February 14 to allow investors more time to analyze the offers, according to the National Hydrocarbons Commission (CNH).  

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