Emerging Markets: What has Changed

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

1) The central bank of Indonesia surprised markets again

2) Data in Brazil are improving

3) Chinese lending data suggest signs of greater activity in the shadow banking sector

4) The Russian opposition party fared very well in the Moscow election

1) The central bank of Indonesia surprised markets again. The BI hiked rates by 25 bp to 7.25%. As we had noted before, interest rates have been one of the preferred tools for helping to control IDR weakness, along with bond purchases. This makes sense since the economy is still showing signs of overheating, with inflation still just under 9.0%. USD/IDR broke below the 11150 support level, opening the door to a move towards 11000.

2) Data in Brazil are improving. After the much higher-than-expected GDP figures for Q2, we now know that Brazil retail sales grew at 6.0% in July, more than three times the pace of June. However, in between those two data points, we did get some downbeat industrial production data, which shows where the core of the growth problem in Brazil lies. Still, these events all but consolidate our call for rates to plateau at 9.75%, with a risk of more hikes later on depending on, for example, the degree of inflation pass-through. To keep things in perspective, the current BRL bounce only took USD/BRL down to the 38% retracement objective of this year's march-August rise, near 2.26.

3) Chinese lending data suggest signs of greater activity in the shadow banking sector. Aggregate financing jumped RMB1.57 trln in August and snaps the downtrend that had been in place since the start of Q2. However, new yuan loans rose RMB711 bln (from RMB700 bln in July). The gap between the new yuan loans and the aggregate financing is often taken as a proxy measure of the shadow banking activity. At RMB858 bln, this spread is back to levels not seen since April, but still well below the highs of RMB2.550 trln in March. This is a very volatile series, but the upturn bears watching in the months ahead. Though the economy appears to be stabilizing, we think policymakers will keep USD/CNY broadly sideways in the 6.10-6.15 range.

4) The Russian opposition party fared very well in the Moscow election. Putin's candidate, Sobyanin, still won over the reformer Navalny in the first round of the first direct election of the Moscow mayor since 2004. Sobyanin received about 51% of the votes, against 27% for Navalny. Demonstrations after the event were minor and without violence. In the end, the results consolidate Navalny as the leading opposition figure, but do little to change the near-term political landscape in Russia. The ruble will likely continue to be buffeted by high oil prices on the one hand and worsening EM sentiment on the other hand.