Emerging Markets: What Has Changed

(from my colleague Dr. Win Thin)

1) The Australian Bureau of Meteorology softened its forecast for El Niño

2) China stocks rose as the first IPOs in four months were well-received

3) Czech central bank said the koruna cap won’t be scrapped before Q2 2015

4) Russian lawmakers rescinded authority for him to use force in Ukraine

5) South Africa’s platinum union ended its strike, but tensions rise elsewhere

6) Argentina has softened its stance about negotiating with holdouts

7) Brazil signals greater comfort with currency strength

8) Colombia’s central bank has increased its planned FX intervention for Q3

Over the last week, Argentina (+8.6%), Philippines (+2.8%), and Pakistan (+1.8%) have outperformed in the EM equity space in local currency terms, while Brazil (-3.1%), Egypt (-3.0%), and Hungary (-3.0%) have underperformed. To put this in better context, MSCI EM was -0.4% over the past week.

In the EM local currency bond space, Ukraine (10-year yield -60 bp), Hungary (-26 bp), and Russia (-15 bp) have outperformed over the last week, while Indonesia (10-year yield +18 bp), Turkey (+8 bp), and India (+4 bp) have underperformed. To put this in better context, the 10-year UST yield was -10 bp over the past week.

In the EM FX space, RUB (+2.0% vs. USD), CLP (+1.2%), BRL and ZAR (both +0.8%) have outperformed over the last week, while IDR (-1.4% vs. USD), HUF (-0.8% vs. EUR), and PKR (-0.4%) have underperformed.

1) The Australian Bureau of Meteorology softened its forecast for El Niño. While the bureau maintained the strong likelihood of El Nino developing this year in its latest bulletin, it noted that “in the absence of the necessary atmospheric response, warming has leveled off in recent weeks.” We note that this has potential significance for a lot of agricultural-based EM economies. India for one has been bracing for weaker than usual monsoon rains due to El Nino, which would hurt GDP growth and push up food prices and inflation. If the El Nino impact is limited, this would be bullish for India.

2) China stocks rose as the first IPOs in four months were well-received. Recent China data showing the economy stabilizing may have helped sentiment, as did pricing that was reportedly at below average valuations and so were attractive for investors. China regulators plan to allow only about 100 IPOs in H2. 

3) Czech central bank said the koruna cap won’t be scrapped before Q2 2015. This is a slight shift from previous forward guidance of possible end to floor in early 2015. The bank added that the cap exit may be delayed further, as it sees an increased need for a delay. Overall, pretty dovish comments that suggest concerns about the economy remain high despite the cyclical recovery under way.

4) As President Putin requested, Russian lawmakers rescinded authority for him to use force in Ukraine, signaling a desire to further cool tensions. Russia has agreed to new talks on July 11 with the EU and Ukraine, but a peace agreement is not a done deal as rebel groups still appear to be attacking government forces. Polls show Putin’s popularity in Russia at a staggering 86%, up from 83% in May and near the peak 88% in autumn 2008.

5) South Africa’s platinum union ended its strike, but tensions rise elsewhere. The accepted offer includes pay increases of as much as 8% or 1,000 rand per month for the lowest-paid workers, whichever is greater. However, labor strife looks set to continue as the National Union of Metalworkers said it will strike next month over wages. With over 220k members ready to strike (compared to 70k platinum workers that struck) and encompassing engineers as well, this stoppage could have a big impact on an already reeling economy.

6) Argentina has softened its stance about negotiating with holdouts. After the US Supreme Court ruling, the country really has no choice. President Fernandez and Economy Minister Kiciloff have both signaled willingness to strike a deal. Argentina must now pay the holdouts at the same time as a scheduled payment on restructured bonds June 30. There is a 30-day grace period before a default will be declared, so in effect Argentina and its creditors have a little over a month to come up with a deal.

7) Brazil signals greater comfort with currency strength. The fact that the central bank just officially extended its swap program until year-end at unchanged amounts and at current exchange rates near 2.20 suggests it is comfortable with BRL strength. The revised forecasts in the central bank’s quarterly inflation report are noteworthy, where 2014 inflation was raised to 6.4% from 6.1% previously even as 2014 growth was lowered to 1.6% from 2.0% previously. 

8) Colombia’s central bank has increased its planned FX intervention for Q3. Up to $2 bln may be bought in Q3. For Q2, Colombia had announced a $1 bln plan and so they are stepping up the amounts. This is not too surprising, as rate hikes are likely to attract more foreign inflows and strengthen the peso.