Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

• PBOC reinstated a 20% reserve ratio for financial institutions conducting FX forward transactions.
• China said it plans to slap tariffs at levels of 25%, 20%, 10%, and 5% on about $60 bln of US imports.
• Reserve Bank of India hiked rates 25 bp to 6.5%, as expected.
• Czech central bank adjusted many of its forecasts after hiking rates 25 bp to 1.25%.
• A bipartisan group of US senators introduced legislation to impose new sanctions on Russia for continued interference in US elections.
• The US imposed sanctions on two Turkish officials over the continued detention of American pastor Andrew Brunson.
• Brazil COPOM tilted more dovish as it kept rates steady at 6.5%.
• Banco de Mexico tilted more dovish as it kept rates steady at 7.75%.

In the EM equity space as measured by MSCI, Qatar (+6.7%), Egypt (+5.5%), and Hungary (+2.4%) have outperformed this week, while China (-4.9%), Hong Kong (-3.2%), and Singapore (-2.2%) have underperformed.  To put this in better context, MSCI EM fell -1.6% this week while MSCI DM fell -0.1%. 

In the EM local currency bond space, the Philippines (10-year yield -20 bp), China (-5 bp), and Poland (-5 bp) have outperformed this week, while Turkey (10-year yield +101 bp), Argentina (+28 bp), and Brazil (+27 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 2 bp to 2.95%. 

In the EM FX space, PKR (+4.8% vs. USD), PLN (+0.8% vs. EUR), and HUF (+0.7% vs. EUR) have outperformed this week, while TRY (-4.5% vs. USD), ILS (-1.2% vs. USD), and ZAR (-1.0% vs. USD) have underperformed.  To put this in better context, MSCI EM FX fell -0.2% this week. 

People’s Bank of China reinstated a 20% reserve ratio for financial institutions conducting FX forward transactions for clients.  By way of explanation, this reserve requirement was first introduced in 2015 to help stabilize the yuan after the surprise devaluation.  It was removed last September in order to slow CNY appreciation.  By putting it back on, the PBOC is signaling that it wants to slow CNY depreciation.  This supports our view that China is not weaponizing CNY with regards to trade tensions. 

China said it plans to slap tariffs at levels of 25%, 20%, 10%, and 5% on about $60 bln of US imports.  The Finance Ministry said it will implement these tariffs as soon as the US enacts its tariffs on Chinese imports.  Commerce Secretary Wilbur Ross warned that there’s more pain ahead unless China changes its economic system.  With neither side showing signs of backing down, trade tensions are likely to remain high.

Reserve Bank of India hiked rates 25 bp to 6.5%, as expected.  There was one dissent in favor of steady rates.  A neutral stance was maintained, but that same stance didn’t stop the RBI from hiking today.  CPI rose 5.0% y/y in June, the highest since January and in the top half of the 2-6% target range.  WPI rose 5.77% y/y in June, the highest since December 2013 and support the case for higher CPI inflation ahead. 

Czech central bank adjusted its forecasts after hiking rates 25 bp to 1.25%.  Most importantly, the bank raised its 2019 average PRIBOR forecast only marginally from 1.6% to 1.7%.  This implies only two more hikes between now and end-2019, which the market took as dovish.  The bank also cut its 2018 growth forecast from 3.9% to 3.2%. 

A bipartisan group of US senators introduced legislation to impose new sanctions on Russia for continued interference in US elections.  These sanctions are much stronger than existing ones and include penalties on trading Russian sovereign debt and investing in energy projects.  Republican Senator Lindsey Graham of South Carolina said the goal is to "impose crushing sanctions and other measures against Putin’s Russia until he ceases and desists meddling in the US electoral process.”

The US imposed sanctions on two Turkish officials over the continued detention of American pastor Andrew Brunson.  The sanctions target Minister of Justice Abdulhamit Gul and Minister of Interior Suleyman Soylu, both of whom “played leading roles in the organizations responsible for the arrest and detention of Pastor Andrew Brunson,” according to the US Treasury statement.  Turkey said it would retaliate.

Brazil COPOM tilted more dovish as it kept rates steady at 6.5%.  The bank said it views the recent rise in inflation as temporary.  We disagree, as pipeline price pressures are strong.  Next policy meetings will be held September 19, October 31, and December 12.  If inflation continues to trend higher and pressure on the real picks up as we expect, COPOM will have to consider a hike in September.

Banco de Mexico tilted more dovish as it kept rates steady at 7.75%.  Like Brazil, Mexico also said that it views the recent rise in inflation as temporary.  Like Brazil, PPI inflation has spiked up, rising 9.2% y/y in June.  Next policy meetings will be held October 4, November 15, and December 20.  If inflation continues to trend higher and pressure on the peso picks up as we expect, Banxico will have to consider a hike in Q4.   

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