Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

  • China officials unveiled a set of policies designed to support the weakening economy.
  • South African Reserve Bank is leaning more hawkish.
  • Central Bank of Turkey delivered a dovish surprise.
  • US-Turkey relations have worsened
  • Moody’s downgraded Chile by a notch to A1 with a stable outlook.
  • US-Mexico trade negotiations may be improving.
  • Political uncertainty is picking up again in Peru.

In the EM equity space as measured by MSCI, Poland (+4.8), the Philippines (+3.9%), and Mexico (+3.6%) have outperformed this week, while Colombia (-0.6%), Czech Republic (-0.2%), and Korea (-0.2%) have underperformed.  To put this in better context, MSCI EM rose 2.2% this week while MSCI DM rose 1.1%.

In the EM local currency bond space, South Africa (10-year yield -15 bp), Hungary (-14 bp), and Indonesia (-13 bp) have outperformed this week, while Turkey (10-year yield +72 bp), the Philippines (+26 bp), and Argentina (+15 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 12 bp to 2.96%. 

In the EM FX space, CLP (+2.6% vs. USD), MXN (+2.5% vs. USD), and ZAR (+1.8% vs. USD) have outperformed this week, while TRY (-1.2% vs. USD), ILS (-0.9% vs. USD), and CNY (-0.7% vs. USD) have underperformed.  To put this in better context, MSCI EM FX rose 0.6% this week. 

China officials unveiled a set of policies designed to support the weakening economy.  The effort focuses on boosting domestic demand.  Measures include targeted tax cuts and accelerating new infrastructure.  This is a clear shift away from the deleveraging campaign, and it appears that the State Council dropped the "neutral" characterization of monetary policy. 

South African Reserve Bank is leaning more hawkish.  The bank said it would act if inflation “significantly exceeds” 4.5%.   CPI rose 4.6% y/y in June and July data is due out August 22.  Signs point to accelerating inflation but the term "significantly" is open to interpretation.  Next policy meetings are September 20 and November 22 and decisions will clearly be data-dependent. 

Central Bank of Turkey delivered a dovish surprise.  It left rates steady at 17.75%, while consensus saw a 100 bp hike.  July CPI data is due out next Friday, August 3, and a bad reading would likely lead to another leg lower for the lira.  Next scheduled CBT meeting is September 13, but an intra-meeting hike will be needed if market sentiment goes further south. 

US-Turkey relations have worsened.  After a deal to release imprisoned US pastor Andrew Brunson fell apart, the White House threatened “large” sanctions on Turkey.  Brunson was freed from jail and put under house arrest while his trial continues. 

Moody’s downgraded Chile by a notch to A1 with a stable outlook.  The agency cited "the gradual but broad-based deterioration in Chile’s credit profile."  Moody’s added that it does not expect Chile to regain the credit strength that it had in prior years.  Our own ratings model gives Chile an implied rating of BBB+/Baa1/BBB+ and so we see continued downward pressure on its A+/A1/A ratings. 

US-Mexico trade negotiations may be improving.  USTR Lighthizer said it’s possible that a tentative NAFTA agreement could be reached next month.  Meanwhile, President Trump said he’s in discussions with incoming President Andres Manuel Lopez Obrador about doing something “very dramatic, very positive for both countries.”   

Political uncertainty is picking up again in Peru.  New recordings leaked in a drug-trafficking probe show judges negotiating sentences and court appointments in exchange for favors.  This latest scandal will likely hurt many of the nation’s politicians, though none have yet been implicated.  President Vizcarra took over when former President Kuczynski resigned on corruption charges. 


(here is a link to the chart)


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Emerging Markets: What Changed Emerging Markets:   What Changed Reviewed by Marc Chandler on July 27, 2018 Rating: 5
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