Emerging Markets: What Has Changed

(from my colleague Dr. Win Thin)

• Moon Jae-in was elected president of South Korea
• Philippine President Duterte named Nestor Espenilla as central bank governor
• Nigerian President Buhari traveled to London for a follow-up to the initial medical visit earlier this year
• Market expectations for 2018 inflation in Brazil rose for the first time in more than a year
• Peru's central bank unexpectedly started the easing cycle with a 25 bp cut to 4.0%

In the EM equity space as measured by MSCI, Brazil (+5.5%), Hungary (+4.3%), and Colombia (+4.3%) have outperformed this week, while Thailand (-0.9%), Poland (-0.7%), and the Philippines (-0.6%) have underperformed.  To put this in better context, MSCI EM rose 2.5% this week while MSCI DM fell -0.2%.

In the EM local currency bond space, Poland (10-year yield -14 bp), Brazil (-12 bp), and Hungary (-10 bp) have outperformed this week, while Czech Republic (10-year yield +25 bp), Argentina (+21 bp), and Turkey (+17 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 1 bp to 2.34%.

In the EM FX space, RUB (+1.5% vs. USD), BRL (+1.4% vs. USD), and MXN (+1.2% vs. USD) have outperformed this week, while TRY (-0.7% vs. USD), PEN (-0.5% vs. USD), and ARS (-0.3% vs. USD) have underperformed.

Moon Jae-in was elected president of South Korea.  We think the biggest potential change coming from the election is in North-South (and as a result, US-South Korea and China-South Korea) relations.  President-elect Moon has said he will resume the "sunshine policy" of engagement with Pyongyang after 9 years of the hardline conservative approach, and will review the controversial THAAD missile shield.

Philippine President Duterte named Nestor Espenilla as central bank governor.  He succeeds Amando Tetangco, who retires in July after completing two six-year terms. Espenilla has worked at the central bank for over three decades, and has been Deputy Governor and head of bank supervision since 2005.

Nigerian President Buhari traveled to London for a follow-up to the initial medical visit earlier this year.  Spokesperson said that “The President wishes to assure all Nigerians that there is no cause for worry.”  Before this trip, Buhari had not been seen in public lately and so observers are left wondering if the situation is more than just a follow-up.

Market expectations for 2018 inflation in Brazil rose for the first time in more than a year.  According to the central bank’s weekly survey, analysts raised their 2018 forecast for IPCA consumer inflation to 4.39% from 4.30% previously, marking the first increase since March 2016.

Peru's central bank unexpectedly started the easing cycle with a 25 bp cut to 4.0%.  We thought it would wait until H2 given inflation is still above target, but the sluggish economy was the likely trigger.  Peru joins Chile, Colombia, and Brazil in easing.  Mexico stands out as the exception in the region, as it is still in tightening mode.  

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