Emerigng Markets: What has Changed?

(from my colleague Ilan Solot)

1) While not yet official, it’s now almost a given that Jokowi has won the Indonesian elections

2) The Korean central bank may be ready to cut soon

3) Brazil is out of the World Cup, but equity markets are celebrating

4) China’s trade surplus was nearly 20% smaller than expected

5) Modinomics is launched in India

6) Malaysia hiked rates for the first time in three years

The outperformers in the currency markets this week were IDR (+3.0%), RUB (0.7%), THB (0.7%). CLP (-1.00%) and INR (-0.7%) were the underperformers. Amongst major EM equity markets, Indonesia (+9.7%) and Argentina (+3.1%) outperformed, while Czech (-5.8%) and South Africa (-2.0%) underperformed

1) While not yet official, it’s now almost a given that Jokowi will win the Indonesian elections. USD/IDR forwards are down another 1.4% today and the Jakarta index was up 0.7% while most of its regional peers were lower. We think positive momentum for local assets could continue, albeit modestly. The next step will be for Jokowi to show that he really is ready to take action. We also note that unlike the case in India with Modi, Jokowi will not have the same degree of parliamentary support, so a less ambitious agenda is to be expected. 

2) The Korean central bank may be ready to cut soon. The bank left rates unchanged at 2.50%, as expected, but the statement sounded dovish. Officials reduced the 2014 growth forecast to 3.8% from 4.0% and made a point of characterizing the inflation trend as tame. There was also one dissenting vote. The strong won gives the bank plenty of degrees of freedom to sound dovish. We think the likelihood of a near-term rate cut has increased. KRW has underperformed marginally on the day, but remains at a relatively strong level. As we had expected, the appreciation trend would start to slow down as we approach the key USD/KRW 1000 level, amid verbal and actual FX intervention, as well as already heavy positioning.

3) Brazil is out of the World Cup, but equity markets are celebrating. The (admittedly tenuous) connection between the two is that the government’s popularity may be weighed down by the brutal loss against Germany (and the possible triple whammy if you add another big loss by Netherlands for the third place and a victory of Argentina). The Bovespa is up almost 1% since the loss against Germany, in contrast with the steep declines in global equity markets. Separately, we note that while the IPCI inflation for June brought an uncomfortably high headline figure, the underlying elements were somewhat positive, especially the deceleration in food prices. 

4) China’s trade surplus was nearly 20% smaller than expected. Exports rose 7.2% from a year ago, which is a slightly better than the 7.0% reported in May, but not as good as the 10.4% expected. Imports rose 5.5%, not the 6% expected. It follows a 1.6% decline in May. Generally, the data supports ideas that the Chinese economy has stabilized.

5) It’s a good enough start to “Modinomics.” in India. India’s finance minister Jaitley kept the budget deficit target at 4.1% for the 2015 fiscal year, suggesting that the incoming administration is ready to take aggressive action. Another notable announcement was to raise the cap on approval for foreign direct investment. This is an important step in beginning to tackle the fragility of India’s external account, which relies too heavily on short-term capital (especially equity inflows) to cover the deficit. Longer dated local bonds yields are down about 4 bp on the day.

6) Malaysia central bank raised rates for the first time in three years. The bank hiked 25 bp to 3.25%, against mixed market expectations. This follows a shift in tone from the last policy meeting. This time around they acknowledged that inflation was running “above the long-run average.” Indeed, the economic recovery continues and CPI is elevated at 3.4% y/y.