Emerging Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1) Higher inflation in Turkey spoiled the central bank’s rate cut aspirations and set off a new barrage of criticism from the government

2) The PBOC cut its reserve requirement by 50 bp to 19.5%

3) The Czech central bank moved its forward guidance further out

4) Ukraine hiked rates 5.5 percentage points (effective Friday) and basically floated the exchange rate

5) Petrobras shares rebounded sharply after news that its chief executive would resign, but has since given up some gains when the new head was announced

Over the last week, Russia (+12.2%), Hungary (+7.2%), and UAE (+6.3%) have outperformed in the EM equity space as measured by MSCI, while Turkey (-4.0%), Hong Kong (-0.8%), and the Philippines (-0.2%) have underperformed.  To put this in better context, MSCI EM rose 1.6% over the past week while MSCI DM rose 3.0%.

In the EM local currency bond space, Russia (10-year yield -91 bp), Ukraine (-54 bp), and Colombia (-11 bp) have outperformed over the last week, while Turkey (10-year yield +50 bp), Brazil (+45 bp), and South Africa (+30 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 27 bp over the past week.

In the EM FX space, RUB (+3.8% vs. USD), COP (+2.4%), and MYR (+2.3%) have outperformed over the last week, while BRL (-3.2% vs. USD), TRY (-1.0%), and PEN (-0.3%) have underperformed.

1) Higher inflation in Turkey spoiled the central bank’s rate cut aspirations and set off a new barrage of criticism from the government.  Inflation came in higher than expected at 7.24% y/y, but more importantly, it fell short of the 1% decline that the central bank had signalled would be necessary for an intra-meeting rate cut.  True to their word, there was no emergency meeting. So of course, Turkish President Erdogan attacked the central bank, saying that “some are trying to hold Turkey back with high interest rates.”  The lira is the second worst performing currency this week, after the Brazilian real.

2) The PBOC cut its reserve requirement by 50 bp to 19.5%.  It also further eased reserve requirements to support the specific sectors such as agricultural and SMEs.  This probably means more rate cuts are on the way, but the move also relates to the tighter liquidity situation ahead of the Chinese New Year’s.

3) The Czech central bank moved its forward guidance further out.  Previously, the bank had pledged not to scrap its koruna cap before 2016.  After this week’s policy meeting, the bank pledged not to scrap it until at least H2 2016.  We think there is a high bar for an outright shift in the cap level.

4) Ukraine hiked rates 5.5 percentage points (effective Friday) and basically floated the exchange rate.  The hryvnia promptly fell over 30% against the dollar.  The central bank will cancel the daily indicative rate and its dollar auctions, but currency controls remain in place.  We believe the move was unavoidable, as foreign reserves fell to a cycle low of $6.4 bln in January.  Ukraine officials are hoping for new IMF money.  With talks ongoing in Kiev, the UAH flotation may be one of the requirements to getting that money.  After all, the IMF would not want it used in a futile attempt to prop up the currency.

5) Petrobras shares rebounded sharply after news that its chief executive would resign, but has since given up some gains when the new head was announced.  Five other directors resigned with her. It appears as if the company’s new head will be Banco do Brasil’s CEO Ademir Bendine.  The name is certainly not as market-friendly as some of the other names being discussed, such as former central bank President Meirelles, but many will be happy to know that there is someone in place.  On net, company’s stock price is still trading higher than where it started the week, but it fell 7.5% after the announcement of the new CEO.