Emerging Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1. Turkey looks to have a coalition government for the first time since

2002.

2. Brazil’s central bank is reducing its rollover of FX swaps.

3. Hungary recorded the first positive y/y CPI reading in 8 months.

4. MSCI deferred its decision on including China A-shares in its indices.

5. Mexican President Pena Nieto would not commit to reappointing central bank Governor Carstens.

6. Poland will see a cabinet reshuffle as three ministers and the parliamentary speaker resigned.

7. Russia central bank adjusted the amounts of its daily FX purchases in response to currency moves.

8. Ukraine is edging closer to a disorderly default.

9. Venezuela withdrew $1.5bn worth of its IMF’s Special Drawing Rights (SDR’s).

Over the last week, Colombia (+4.7%), Czech Republic (+3.4), and Russia (+3.4%) have outperformed in the EM equity space as measured by MSCI, while Indonesia (-4.2%), Turkey (-2.7%), and Hong Kong (-2.4%) have underperformed. To put this in better context, MSCI EM fell -0.3% over the past week while MSCI DM rose 0.5%. 

In the EM local currency bond space, Russia (10-year yield -29 bp), Mexico (-10 bp), and the Philippines (-4 bp) have outperformed over the last week, while Ukraine (10-year yield +116 bp), Hungary (+34 bp), and Indonesia (+17 bp) have underperformed. To put this in better context, the 10-year UST yield fell -4 bp over the past week.

In the EM FX space, COP (+3.4% vs. USD), RUB (+2.0%), and MXN (+1.9%) have outperformed over the last week, while TRY (-2.1% vs. USD), PHP (-1.2%), and MYR (-1.1%) have underperformed. 

1. Turkey looks to have a coalition government for the first time since 2002. Despite fears that new elections would have to be called, the ruling AKP appears ready to form a coalition. The parties have 45 days to form a government, and negotiations will likely be slow since all three opposition parties campaigned strongly against the AKP. While there is a risk of policy paralysis under a coalition, the natural checks and balances on the AKP should be viewed as a positive development. Tensions with the central bank may ease too.

2. Brazil’s central bank is reducing its rollover of FX swaps. This signals that policy makers are not so concerned about further BRL weakness, which is another reason we think USD/BRL will head higher. Brazil’s central bank this week cut the daily rollover auction amount to up to 6,300 FX swap

contracts, down from 7,000 in previous days this month. Meanwhile, IPCA inflation rose 8.47% y/y in May, the highest rate since 2003 and keeping the central bank on track for another 50 bp hike in July. Markets are starting to price in a further 25 bp hike in September.

3. Hungary recorded the first positive y/y CPI reading in 8 months. And it came in on the high side at 0.5% y/y compared with 0.1% expected. With deflation risks easing and the real sector in good shape, we think the easing cycle is nearing an end. One more 15 bp cut to 1.5% this month should be the last move before an extended pause. 

4. MSCI deferred its decision on including China A-shares in its indices. However, it announced that it would work together with regulator CSRC to address the remaining concerns. This suggests to us that it is only a matter of when, not if, A-shares will eventually be included by MSCI. We expect a yes decision before the next official MSCI review in June 2016.

5. Mexican President Pena Nieto would not commit to reappointing central bank Governor Carstens. While praising Carstens, Pena Nieto said “We’ll see in December what happens.” That is when Carstens’ (who was nominated by then-President Calderon) 6-year term ends. While there is no shortage of capable hands in Mexico, Carstens is highly regarded by the markets. He has been willing to adapt policy as circumstances change, delivering several rate cuts during Pena Nieto’s term when the data worsened.

6. Poland will see a cabinet reshuffle as three ministers and the parliamentary speaker resigned. Treasury Minister Karpinski, parliamentary speaker Sikorski, Port Minister Biernat, and Health Minister Arlukowicz stepped down. Their exits are apparently related to the current leaks of the “tape affair” investigation related to recordings of private meetings of current and former ministers, central bank Governor Belka, and others that were first uncovered last June. We would expect more changes ahead of upcoming parliamentary elections in October. So far, the cabinet changes are minor but Civic Platform may tilt policies more populist in order to win back some support. 

7. Russia central bank adjusted the amounts of its daily FX purchases in response to currency moves. On the days that ruble weakness intensified, the bank either refrained from buying or lowered the amount from its usual $200 mln per day. To us, this signals a comfort with perhaps a 50-55 or 50-60 range for USD/RUB. 

8. Ukraine is edging closer to a disorderly default. The main creditor group will not revise its proposal that was rejected by the government, leading to an impasse even as debt payments come due at the end of the month. Finance Minister Jaresko said that Ukraine would stop servicing its debt if no progress is made. Creditors are refusing to consider any sort of principal writedown, saying they are not necessary to reach IMF-mandated targets.

9. Venezuela withdrew $1.5bn worth of its IMF’s Special Drawing Rights (SDR’s). This follows a draw of nearly $400 mln earlier in the year and now Venezuela’s holdings of SDRs are down to $1.3bn. Meanwhile, international reserves are down to $17bn, the lowest level since 2003. It seems as the country is ground increasingly desperate for hard currency, especially after last year fall in oil prices. We can’t see the situation getting any better.

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