Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

Tensions on the Korean peninsula appear to be easing.
Relations between Pakistan and the US have worsened.
The Philippine central bank is tilting more hawkish.
The ANC may consider removing Zuma from the presidency at the January 10 meeting of its National Executive Committee.
Turkish banker Atilla was convicted of helping Iran evade US financial sanctions.
Argentina sold $9 bln of dollar-denominated external debt.
Former Peru President Fujimori is now a free man.

In the EM equity space as measured by MSCI, Peru (+6.4%), Russia (+5.9%), and Colombia (+5.7%) have outperformed this week, while Egypt (-2.5%), Qatar (+0.1%), and South Africa (+0.1%) have underperformed. To put this in better context, MSCI EM rose 3.5% this week while MSCI DM rose 2.2%.

In the EM local currency bond space, Peru (10-year yield -23 bp), Indonesia (-15 bp), and Mexico (-12 bp) have outperformed this week, while Argentina (10-year yield +21 bp), Czech Republic (+14 bp), and Turkey (+9 bp) have underperformed. To put this in better context, the 10-year UST yield rose 6 bp to 2.47%.

In the EM FX space, COP (+3.1% vs. USD), BRL (+2.3% vs. USD), and MXN (+1.8% vs. USD) have outperformed this week, while ARS (-1.7% vs. USD), CZK (-0.1% vs. EUR), and PHP (-0.1% vs. USD) have underperformed.

Tensions on the Korean peninsula appear to be easing. North Korea called for direct bilateral talks with South Korea before the opening of the Winter OIympic Games next month. South Korea responded positively and invited a North Korean delegation to attend the Olympics. Pyongyang accepted, which would seem to lower the odds that it will do something to disrupt the games.

Relations between Pakistan and the US have worsened. The State Department announced it will suspend most of its security assistance to Pakistan. This comes just days after President Trumps tweet criticizing Pakistan. State Department spokeswoman said the suspension of aid would remain in effect until Pakistan takes "decisive action" against the Taliban other terrorist networks.

The Philippine central bank is tilting more hawkish. Governor Espenilla said that the bank is ready to adjust monetary policy to maintain its inflation target as price pressures increase. He noted that inflation may pick up due to rising oil prices and the new tax law that took effect this month. Officials estimate the new tax law will raise inflation by 0.4-0.7 percentage points during the first year, with the impact tapering off over time.

Local press is reporting that the ANC may consider removing Zuma from the presidency at the January 10 meeting of its National Executive Committee (NEC). After Deputy President Ramaphosa won the ANC leadership contest last month, speculation has risen that Zuma would be ousted. Former Tourism Minister Derek Hanekom is reportedly preparing the motion of no confidence in Zuma. Given the very narrow margin of victory for Ramaphosa in the ANC leadership vote, there may not be enough support to oust Zuma.

Turkish banker Atilla was convicted of helping Iran evade US financial sanctions. The verdict is likely to further strain relations between Turkey and the US. Atilla was found guilty of conspiracy and bank fraud after a month-long trial. He is scheduled to be sentenced April 11. Expect US-Turkey relations to remain tense.

Argentina sold $9 bln of dollar-denominated external debt. The government is taking advantage of low borrowing costs, with Argentine spreads to US Treasury bonds the lowest since 2007. Officials say bids totaled $21.4 bln. Maturities were 5-, 10-, and 30-years.

Former Peru President Fujimori is now a free man. He left the clinic where he had been treated since his pardon from a 25-year jail sentence. That pardon came three days after current President Kuczynski narrowly avoided impeachment after 10 members of Fujimori's party unexpectedly abstained. The controversial pardon is likely to further erode Kuczynski’s already low popularity.

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