Emerging Markets: What has Changed

(from my colleague Ilan Solot)

1) The PBOC signalled more stability in the yuan, and that is what we got.
2) The official survey by the Brazilian central bank is now showing an average forecast for 2016 GDP in negative territory for the first time.
3) There are several takeaways from mass anti-government protests in Brazil last Sunday.
4) The Turkish central bank kept all rates unchanged yesterday, but released a road map to simplify is monetary policy framework.
5) Vietnam’s central bank decided to devalue the currency for the third time this year, while Kazakstan moved to a free floating regime.
6) Poland is starting to move backwards on its economic programs.
7) Tensions on the Korean peninsula have flared up. 

In the EM equity space, Israel (-1.0%), Poland (-1.1%), Malaysia (-1.4%) have outperformed over the last week, while China (-11.5%), Argentina (-6.6%), and Taiwan (-6.2%) have underperformed.
In the EM local currency bond space, longer-dated yields in Poland (-4 bp), Taiwan (-4 bp) and Thailand (-4 bp) have outperformed over the last week, while Russia (+54 bp), Turkey (+32 bp) and Brazil (+27 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 4 bp over the past week.

In the EM FX space, SGD (+0.3%), BRL (unchanged) and PLN(-0.5% vs the euro), have outperformed over the last week, while RUB (-5.1%), MXN (-3.0%), and TRY (-2.9%) have underperformed.

1) The PBOC signalled more stability in the yuan, and that is what we got. Earlier in the week, the chief economist of the PBOC, Ma Jun, stated that markets should be ready for more two way risk, and that there was “no intention or need to participate in a currency war.” It’s hard to take these comments at face value, but the fact is that the yuan has been very stable, despite the high volatility in local equity markets and global FX.

2) The official survey by the Brazilian central bank is now showing an average forecast for 2016 GDP in negative territory for the first time. Forecast for 2016 have been trimmed steadily through the last few years. It started 2015 at 1.8% growth, now we are down to -0.15%. To top this off, unemployment rose by much more than expected to 7.5%, the highest level since 2010.

3) There are several takeaways from mass anti-government protests in Brazil last Sunday. They were relatively large, but not the largest. The protests were peaceful, avoiding the worst case scenario. But perhaps the most important development was the strong focus on Lula. Recall that Lula is arguably the most important politician in the country, the central pillar of the PT ruling party, and presumed candidate for the 2018 elections. Many observers believe that the weakening of Lula all but assures a rotation of power for the country. Separately, attorney general Janot brought formal charges against Lower House speaker Eduardo Cunha, accusing him of receiving bribes and laundering money.

4) The Turkish central bank kept all rates unchanged yesterday, but released a road map to simplify is monetary policy framework. This roadmap didn’t provide as much clarity as it most likely intended to. Still, it focused on narrowing the rate corridor (overnight and borrowing rates) and adjusting bank’s borrowing limits. The news wasn’t greeted with much enthusiasm, and a few observers thought it was a missed opportunity to lean against the sharp lira depreciation.

5) Vietnam’s central bank decided to devalue the currency for the third time this year, while Kazakstan moved to a free floating regime. It widened the trading band by 1% overnight, now allowed to fluctuate by 3%. The move is an attempt by policymakers to adjust to still echoing devaluation by China and the looming hike by the Fed. All in all we see this as a positive more and wouldn’t discard further depreciation down the line.   Kazakstan is adopting a free floating currency regime. Tenge reacted by depreciating some 25% in the aftermath of the decision.  The decision was probably due to a combination of weakness in commodity prices and the depreciation of the Russian ruble and the Chinese yuan, the country’s two largest trading partners.

6) Poland is starting to move backwards on its economic programs. Recently elected President Duda has proposed a referendum to reverse the increase in retirement age. The idea is to reduce the retirement age for women by 7 years and by 2 years for men. It’s unclear if the referendum will be approved by parliament, but it still shows the direction Duda’s Law & Justice party is going. General elections will be held on October 25. There has been little market reaction to the news, probably because markets have already begun to price in a populist shift of the Polish government.

7) Tensions on the Korean peninsula have flared up.  Reports say that the two countries exchanged artillery fire across the demilitarized zone. No causalities have been reported, but this comes after South Korean accused the North of setting the land mines that injured two soldiers earlier in the month. This prompted South Korea to restart its program of broadcasting propaganda into North Korea. Now North Korean leader Kim Jong Un has ordered his army to prepare for war. 

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