Emerging Markets: What has Changed

(from my colleague Ilan Solot)

1) Polls for Brazil’s presidential elections showed that Marina is ahead of Dilma in the second round

2) Israel’s central bank surprised markets with a cut

3) The situation on the ground in Ukraine has escalated, again

4) The easing cycle has ended in Hungary

5) Turkey’s central bank stopped cutting its repo rate – but still cut the overnight rate

Over the last week in currency markets, BRL (+1%) and KRW (+1%) have outperformed, while RUB (-1.6%) and CLP (1.4%) have outperformed. 

In the equity space, Argentina (+9.9%), Brazil (+3.5%) and Taiwan (+2.4%) where the outperformers, while Russia (-2.7%), China (-1.5%) and South Africa (-0.5%) underperformed.

In the fixed income market (according to Bloomberg prices), local yields increased the most in Russia (+33 bp) and in the Philippines (+21 bp), and declined the most in Brazil (-60 bp) and in South Africa (-19 bp).

Polls for Brazil’s presidential elections showed that Marina is ahead of Dilma in the second round. The difference between the two is of 9 percentage points, according to IBOPE. In the first round, Dilma comes in with 34% (from 38%), Marina with 29% and Aecio with 19% (from 23%). Maybe even more notable, the rejection rate for Marina (i.e. those who would never vote for her) is by far the lowest at 10%, compared with 36% for Dilma and 18% for Aecio. We should expect a continuation of the rally in Brazilian assets following the news, especially the Bovespa. The idea is that any change of government will be seen as very positive. 

Israel’s central bank surprised markets with a cut. The BOI brought the rates down by 25 bp to a record 0.25%. It seems as if now the bank is open to unconventional measures and using the shekel could be one of these tools. After 12 cuts, inflation remains contained (0.3% y/y) and Q2 GDP disappointed at 1.7% y/y. And of course, the outlook is especially uncertain given the military conflict. We think that the recent depreciation of the shekel (-4.5% month to date) is welcomed by the bank, and suspect BOI officials will be looking at their counterparts in Switzerland and Czech Republic for inspiration. Despite the recent move, we are bearish on ILS both outright and in relative value against the HUF and PLN. 

The situation on the ground in Ukraine has escalated, again. Russian troops, tanks and weapons appear to be entering Ukraine under the guise of the insurgence. This is like a rolling start to a war, and Lithuania officials have called it such. This will be the key focus of next week's important NATO meeting. Unsurprisingly, the high level meeting between Russian and Ukrainian officials yielded little tangible results. 

The easing cycle has ended in Hungary. After two years of easing, rates have reached their trough at a record 2.10%, from 7.00%. The move was mostly expected. We think that rates will remain on hold for quite some time now given the lacklustre economic outlook for Hungary. Still, we are starting look more favourably towards the forint. While rates are too low for it to participate in investors renewed interest in carry, the current account boosts a surplus of 2.7% of GDP which will provide the currency some support. 

Turkey’s central bank stopped cutting its repo rate– but still cut the overnight rate. Despite the continuous political pressure for more easing, the bank was forced to stop cutting the main target rate, for now at least, as inflation remains uncomfortably high, near 9.5% y/y. The repo rate was cut from 10.0% to the current 8.25% since April, though much of this easing was intended as the unwinding of emergency measures. But in effect, it meant an easing bias at time when the bank should have been on the other side of the debate. As a result, these actions left the central bank with even less credibility than it already had. The unexpected 75 bp cut to the overnight lending rate should not make much of an impact.