(from my colleague Dr. Win Thin)
In the EM local currency bond space, Ukraine (10-year yield -72 bp), Brazil (-52 bp), and Turkey (-39 bp) have outperformed over the last week, while Indonesia (10-year yield +4 bp), Hungary (+4 bp), and Malaysia (+3 bp) have underperformed. To put this in better context, the 10-year UST yield fell 8 bp over the week.
In the EM FX space, CLP (+2.5% vs. USD), TRY (+2.1%), and ZAR (+2.0%) have outperformed over the last week, while ILS (-0.6%), THB (-0.5%), and ARS (-0.5%) have underperformed.
1) As USD/BRL broke below the key 2.30 level Wednesday, the Brazilian central bank did not fully roll over swaps coming due in the first round for the first time since September 2013. Instead, it placed 2,400 FX swaps contracts out of 4,000 offered and so markets took this as a not-so-subtle signal that policymakers did not want USD/BRL below 2.30. The central bank then whipsawed the market by placing the remaining 1,600 contracts in a second auction. We (and the markets) are left wondering exactly what the authorities wish to accomplish with BRL trading near 2.30. We still think a firmer BRL would go a ways towards helping the inflation fight, but we await further clarity from Brazil policymakers.
2) S&P downgraded Brazil by one notch to BBB-. The move really wasn't a huge surprise but it still casts a negative light on Brazil fundamentals. The worsening fiscal stance was a major factor behind the move. Slow growth, increased spending, and higher interest rates have all contributed to this, and our own sovereign rating model predicted the downgrade months ago but shows Brazil at BBB-. As such, we do not expect a loss of investment grade for Brazil. However, Moody’s and Fitch should play catch up with S&P and cut a notch as well.
3) The IMF agreed to a standby program for Ukraine that will be between $14-18 bln. Reports suggest the agency will aim to make first disbursements by the end of April so that the nation can continue meeting its external debt obligations. Adding on EU/US aid to the IMF money likely raises the total amount of aid to around $28 bln. Ukraine announced yesterday that household gas prices would be hiked 50% starting May 1. This (as well as greater exchange rate flexibility) was a major sticking point in the past between Ukraine and the IMF, so a new deal easily reached now.
4) SARB gave guidance that was more hawkish than expected. Rates were left steady at 5.5%, as expected, and Governor Marcus gave a very dovish view of the economy in her accompanying statement. Yet she then revealed that the vote was 4-3, with 3 dissents in favor of a hike, and added that interest rates are likely to rise in the future. To us, the main takeaway is that the bar to a rate cut is very high and that the 50 bp January hike is unlikely to be taken back. The remaining SARB meetings this year are May 22, July 17, September 18, and November 20. Can they hike as soon as May? We are very skeptical but a lot depends on conditions (both external and internal). If the EM rally continues in Q2, it seems very likely that USD/ZAR breaks below 10.50 to trade in a lower range. The urgency to hike should ebb a bit if this happens.
5) Hungary slowed down its pace of easing again with a 10 bp cut to 2.60%. Last cut was 15 bp. In case anyone is keeping score at home, the bank has now cut 20 months in row. First 12 were 25 bp, followed by 5 cuts of 20 bp, 2 cuts of 15 bp, and now 1 cut of 10 bp. There has been a total of 440 bp of easing. Yet deflation risks remain, as CPI rose only 0.1% y/y in Feb after flat y/y reading in Jan. Economic data are starting to turn up, but there are risks from the Ukraine crisis. So for now, the easing should continue.
6) The Mexican central bank sounded decidedly more dovish. It kept rates steady at 3.5% last Friday, as expected, but the accompanying statement focused on a weak growth outlook and saw little in the way of lasting price pressures. Bottom line, we believe steady rates are likely for the time being but the emphasis on the poor growth outlook suggests risks are tilted to the next move being a cut, not a hike. Q2 economic data will be key.
1) Brazilian central bank did not fully roll over swaps coming due in the first round for the first time since September 2013
2) S&P downgraded Brazil by one notch to BBB-
3) The IMF agreed to a standby program for Ukraine that will be between $14-18 bln
4) SARB gave guidance that was more hawkish than expected
5) Hungary slowed down its pace of easing again with a 10 bp cut to 2.60%
6) The Mexican central bank sounded decidedly more dovish
Over the last week, Turkey (+3.6%), Singapore (+3.4%), and China (+3.3) have outperformed in the EM equity space in local currency terms, while Peru (-3.0%), Egypt (-2.5%), and the Philippines (-1.6%) have underperformed.
2) S&P downgraded Brazil by one notch to BBB-
3) The IMF agreed to a standby program for Ukraine that will be between $14-18 bln
4) SARB gave guidance that was more hawkish than expected
5) Hungary slowed down its pace of easing again with a 10 bp cut to 2.60%
6) The Mexican central bank sounded decidedly more dovish
Over the last week, Turkey (+3.6%), Singapore (+3.4%), and China (+3.3) have outperformed in the EM equity space in local currency terms, while Peru (-3.0%), Egypt (-2.5%), and the Philippines (-1.6%) have underperformed.
In the EM local currency bond space, Ukraine (10-year yield -72 bp), Brazil (-52 bp), and Turkey (-39 bp) have outperformed over the last week, while Indonesia (10-year yield +4 bp), Hungary (+4 bp), and Malaysia (+3 bp) have underperformed. To put this in better context, the 10-year UST yield fell 8 bp over the week.
In the EM FX space, CLP (+2.5% vs. USD), TRY (+2.1%), and ZAR (+2.0%) have outperformed over the last week, while ILS (-0.6%), THB (-0.5%), and ARS (-0.5%) have underperformed.
1) As USD/BRL broke below the key 2.30 level Wednesday, the Brazilian central bank did not fully roll over swaps coming due in the first round for the first time since September 2013. Instead, it placed 2,400 FX swaps contracts out of 4,000 offered and so markets took this as a not-so-subtle signal that policymakers did not want USD/BRL below 2.30. The central bank then whipsawed the market by placing the remaining 1,600 contracts in a second auction. We (and the markets) are left wondering exactly what the authorities wish to accomplish with BRL trading near 2.30. We still think a firmer BRL would go a ways towards helping the inflation fight, but we await further clarity from Brazil policymakers.
2) S&P downgraded Brazil by one notch to BBB-. The move really wasn't a huge surprise but it still casts a negative light on Brazil fundamentals. The worsening fiscal stance was a major factor behind the move. Slow growth, increased spending, and higher interest rates have all contributed to this, and our own sovereign rating model predicted the downgrade months ago but shows Brazil at BBB-. As such, we do not expect a loss of investment grade for Brazil. However, Moody’s and Fitch should play catch up with S&P and cut a notch as well.
3) The IMF agreed to a standby program for Ukraine that will be between $14-18 bln. Reports suggest the agency will aim to make first disbursements by the end of April so that the nation can continue meeting its external debt obligations. Adding on EU/US aid to the IMF money likely raises the total amount of aid to around $28 bln. Ukraine announced yesterday that household gas prices would be hiked 50% starting May 1. This (as well as greater exchange rate flexibility) was a major sticking point in the past between Ukraine and the IMF, so a new deal easily reached now.
4) SARB gave guidance that was more hawkish than expected. Rates were left steady at 5.5%, as expected, and Governor Marcus gave a very dovish view of the economy in her accompanying statement. Yet she then revealed that the vote was 4-3, with 3 dissents in favor of a hike, and added that interest rates are likely to rise in the future. To us, the main takeaway is that the bar to a rate cut is very high and that the 50 bp January hike is unlikely to be taken back. The remaining SARB meetings this year are May 22, July 17, September 18, and November 20. Can they hike as soon as May? We are very skeptical but a lot depends on conditions (both external and internal). If the EM rally continues in Q2, it seems very likely that USD/ZAR breaks below 10.50 to trade in a lower range. The urgency to hike should ebb a bit if this happens.
5) Hungary slowed down its pace of easing again with a 10 bp cut to 2.60%. Last cut was 15 bp. In case anyone is keeping score at home, the bank has now cut 20 months in row. First 12 were 25 bp, followed by 5 cuts of 20 bp, 2 cuts of 15 bp, and now 1 cut of 10 bp. There has been a total of 440 bp of easing. Yet deflation risks remain, as CPI rose only 0.1% y/y in Feb after flat y/y reading in Jan. Economic data are starting to turn up, but there are risks from the Ukraine crisis. So for now, the easing should continue.
6) The Mexican central bank sounded decidedly more dovish. It kept rates steady at 3.5% last Friday, as expected, but the accompanying statement focused on a weak growth outlook and saw little in the way of lasting price pressures. Bottom line, we believe steady rates are likely for the time being but the emphasis on the poor growth outlook suggests risks are tilted to the next move being a cut, not a hike. Q2 economic data will be key.
Emerging Markets: What has Changed
Reviewed by Marc Chandler
on
March 27, 2014
Rating:
Reviewed by Marc Chandler
on
March 27, 2014
Rating:
