Emerging Markets: What has Changed

(from my colleague Ilan Solot)

(1) The Brazilian elections were sent into a spin with the death of Campos

(2) The Russian central bank once again changed its FX policy mechanism, moving closer to a free-floating exchange rate and inflation target

(3) The end of the tightening cycle in Colombia is near

Over the last week, Brazil (+5.9%), Argentina (+5.6%) and Russia (+3.4%), have outperformed in the EM equity space, while Israel(-1.0%) and Korea (-0.9%) have underperformed. To put this in better context, MSCI EM rose 0.9% % over the past week

In the EM local currency bond space, Hungary’s 10-year yield, down -34 bp was the main mover. To put this in better context, the 10-year UST yield was +4 bp over the past week.

In the EM FX space, BRL (+0.4%), MYR (+0.3%) have outperformed over the last week, while COP (-1.8%), ZAR (-1.2%), and PEN (-1.2%) have underperformed.

(1) The Brazilian elections were sent into a spin with the death of Campos. Polls released earlier in the week show that, his running mate, Marina Silva, has surged in voter’s intentions. In fact, she came out in front of President Dilma in the second round, with 47%. Much of the support for Marina came from a reduction of previously undecided voters, which is obviously a more volatile slice of the constituency. Still, we think that many Brazilians will see her as an alternative to the more established parties and candidates. We reiterate that we see this news as very positive, both for markets and for the country.  See Is Marina the New Modi?

(2) The Russian central bank once again changed its FX policy mechanism, moving closer to a free-floating exchange rate and inflation target. The bank widened the trading corridor from 7 to 9 rubles to 35.40-44.40 for the basket. It also reduced the amount of intervention necessary for a 5 kopeck shift in the corridor from $1 bln back to the to $350 mln from before the crisis in Ukraine. This is a bold move by the bank given the geopolitical context. It appears that policymakers are still set on having a free floating ruble by early next year – though we wouldn’t be surprised if they take more time given the risk of capital outflows from the crisis.

(3) The end of the tightening cycle in Colombia is near. After 100 bp of hikes, the minutes from the last meeting suggest that there is not much more to go. Another 25 bp is very likely, but that could very well be the end, or a good place to pause. One MPC member already dissented in favor of pause. We suspect that the value of the peso will play some role, though it will probably not be the decisive factor given that we are well off the recent highs. But at this point, the committee seems to be more concerned about the output gap and the impact or fiscal policy.