Emerging Markets: What has Changed

(from my colleague Dr.Win Thin)

• Korea will extend trading hours for stock and FX markets by 30 minutes effective August 1
• The Monetary Authority of Singapore said it will withdraw BSI Bank’s license for breaches of money-laundering rules
• The US lifted a decades-old arms embargo on Vietnam
• The Nigerian central bank said it would allow “greater flexibility” in the FX market
• Poland signaled a compromise over the judicial row that triggered EU scrutiny
• Brazil Budget Minister Romero Juca was forced to step down
• Banco de Mexico downgraded its growth forecast for next year

In the EM equity space, India (+5.3%), Taiwan (+4.1%), and Hong Kong (+3.6%) have outperformed this week, while Colombia (-1.5%), Qatar (-0.9%), and China (-0.5%) have underperformed. To put this in better context, MSCI EM rose 2.9% this week while MSCI DM rose 1.9%. 

In the EM local currency bond space, the Philippines (10-year yield -48 bp), Turkey (-28 bp), and Ukraine (-14 bp) have outperformed this week, while Brazil (10-year yield +47 bp), Singapore (+6 bp), and Malaysia (+2 bp) have underperformed. To put this in better context, the 10-year UST yield fell -1 bp this week to 1.83%.

In the EM FX space, RUB (+1.2% vs. USD), ILS (+1.0% vs. USD), and KRW (+0.9 vs. USD) have outperformed this week, while BRL (-2.7% vs. USD), MXN (-0.7% vs. USD), and COP (-0.3% vs. USD) have underperformed.

Korea will extend trading hours for stock and FX markets by 30 minutes effective August 1. Korea is taking several measures to increase liquidity and get MSCI Developed Market status. The equity, FX, derivatives and gold markets will close at 3:30 p.m. local time. The longer trading hours should boost equity trading volumes by about 8%, according to Korea Exchange. MSCI releases its annual review of country classification next month.

The Monetary Authority of Singapore said it will withdraw BSI Bank’s license for breaches of money-laundering rules. At the same time, the Swiss Attorney General said criminal proceedings are being taken against the parent bank based on information it obtained from investigations into 1MDB.

The US lifted a decades-old arms embargo on Vietnam. President Obama cited improvements made in allowing greater freedom for its citizens, but he warned that there were still areas of concern. Indeed, it appears that several political activists were barred from meeting with Obama. Still, the latest move is one of many as the two countries normalize relations after the Vietnam War.

The Nigerian central bank said it would allow “greater flexibility” in the FX market. Investors are still seeing delays of up to a month in repatriating funds out of Nigeria. While this suggests a rethink of the peg, no details were given on what "greater flexibility" really entails. The bank said that “modalities” of a new FX framework to boost the supply of dollars would be released “at the appropriate time”.

Poland signaled a compromise over the judicial row that triggered EU scrutiny. Law and Justice said it may allow three appointments to the Constitutional Tribunal made by the previous Civic Platform government. Law and Justice had blocked those appointments when it came to power, and was taking a hard line as recently as last week. A concession that leads to a compromise would lessen the likelihood of EU censuring/sanctioning.

Brazil Budget Minister Romero Juca was forced to step down. Recordings of his conversations were released that suggest Juca wanted to obstruct the Carwash investigations. Juca will return to the Senate and vote on legislation that he helped design. The bill would allow the government to report a primary budget deficit this year, rather than a surplus as originally proposed by Rousseff’s administration.

Banco de Mexico downgraded its growth forecast for next year. The 2017 forecast was cut to 2.3-3.3% from 2.5-3.5% previously. The 2016 forecasts were kept steady at 2-3%. Governor Carstens also said that the bank hopes to make policy decisions within the normal meeting calendar, which we think raised the bar on intra-meeting moves.

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