Emerging Markets Preview for the Week Ahead

(from my colleagues Dr. Win Thin and Ilan Solot)

Global risk-off sentiment and the reelection of Dilma Rousseff as the Brazilian president is setting EM off on the back foot to start the week. However, the lack of large moves in the dollar could mean that negative sentiment will be contained to equity markets. Aside from positioning adjustment following the Brazilian elections, we don’t see any major idiosyncratic risk to look out for this week, and assume that the tone will be set mostly by developed markets.  

The FOMC meeting on Wednesday could lead to some heightened volatility as the Fed struggles with its communications with the markets. Russia remains a red flag, as Ukrainian elections are likely to keep tensions between the two countries high.

Hungarian central bank meets Tuesday and is expected to keep rates steady at 2.1%. However, with deflation risks still high, the central bank could resume easing if the headwinds grow. September PPI will be reported Friday, and should show another y/y drop after -0.4% reported for August. Anti-Orban protests erupted this week, on the back of protests against a proposed internet usage tax. The tax is seen by many as an attempt to restrict the flow of information by an increasingly authoritarian government.

Korea reports September current account data on Wednesday. The external accounts remain strong, and should help support the won. Korea then reports September IP on Thursday, expected to rise 2.8% y/y vs. -2.8% in August. Korea then gives the first glimpse of October trade when it reports data Saturday. Exports are seen rising 1.5% y/y, imports are seen falling -1.4% y/y. Overall, the BOK is likely to remain in dovish mode as headwinds grow.

South Africa reports September money and private sector credit growth on Wednesday. The former is expected to rise 6.5% y/y, while the latter is expected to rise 8.6% y/y. It then reports Q3 unemployment on Thursday, expected at 25.6% vs. 25.5% in Q2. September PPI and budget data come out on Thursday, followed by September trade on Friday (consensus –ZAR11.5 bln). With price pressures easing and fiscal policy tightening, we see no further SARB rate hikes in this cycle.

Chile reports September manufacturing output and retail sales on Wednesday. The former is expected to rise 0.7% y/y, while the latter is expected to rise 1.8% y/y. The economy remains weak, but with inflation at cycle highs and well above the 2-4% target range, the central bank has signaled a pause in the easing cycle after the last 25 bp cut to 3.0% in October.

Brazilian central bank meets Wednesday and is expected to keep rates steady at 11.0%. Market consensus for end-2015 SELIC fell to 11.5% from 11.875% last week. Brazil reports October IGP-M wholesale inflation on Thursday, followed by September PPI and budget data on Friday. While pipeline pressures have eased, inflation at the consumer level remains high.

Taiwan reports Q3 GDP on Friday, expected to rise 3.9% y/y vs. 3.74% in Q2. With mainland China still slowing, there are some downside risks to Taiwan, but we think they are manageable. Export orders rose 12.7% y/y in September, the strongest non-Lunar New Year distorted rate since March 2011. This points to firm exports in 2015.

Thailand reports September trade, current account, and manufacturing production on Friday. The ongoing political standoff has taken a toll on the economy. Manufacturing production is seen at -0.3% y/y vs. -2.7% in August, while both exports and imports are expected to continue contracting y/y as well.

Turkey reports September trade Friday, expected at -$7.1 bln vs. -$8.0 bln in August. If so, the 12-month total would fall to -$85.9 bln from -$86.3 bln in August, putting it back near the cycle lows. Virtually all of the improvement in the external balances has come from collapsing imports, as export growth has slowed to low single digits. When growth picks up again, the external accounts will worsen.

Russian central bank meets Friday and is expected to hike rates 50 bp to 8.5%. There is risk of a more hawkish move given ongoing ruble weakness. However, we think higher rates are unlikely to do much to help support the currency. S&P kept Russia at BBB- with negative outlook last week, as downgrade risks remain alive even as fundamentals deteriorate.

Mexican central bank meets Friday and is expected to keep rates steady at 3.0%. The central bank sees the latest inflation spike as temporary, and so will not hike rates in response. On the other hand, an improved US outlook and better Mexico data should keep the bank from cutting. So, steady rates are likely well into 2015.

Colombian central bank meets Friday and is expected to keep rates steady at 4.5%. The economy is starting to show some signs of slowing. Taken in conjunction with lower oil prices (Colombia’s biggest export), we see a move to a neutral stance now after a fairly aggressive tightening cycle this year.

China reports official October manufacturing PMI on Saturday, and is expected to remain steady at 51.1. HSBC flash PMI for October improved to 50.4 from 50.2 in September, and was slightly stronger than expected. We expect official data to also reflect some stabilization of the economy.