An Emerging Markets Status Update

Over the last week, Colombia (+9.5%), Mexico (+1.9%), and Chile (+0.1%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-9.6%), Turkey (-7.3%), and Russia (-5.8%) have underperformed.  To put this in better context, MSCI EM fell -1.0% over the past week while MSCI DM fell -0.2%.

Over the last week, Colombia (+9.5%), Mexico (+1.9%), and Chile (+0.1%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-9.6%), Turkey (-7.3%), and Russia (-5.8%) have underperformed.  To put this in better context, MSCI EM fell -1.0% over the past week while MSCI DM fell -0.2%.

In the EM local currency bond space, Turkey 10-year yield (-11 bp), Mexico (-8 bp), and Czech Republic (-7 bp) have outperformed over the last week, while Ukraine 10-year yield (+219 bp), Russia (+80 bp), and Hungary (+28 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 5 bp over the past week.

In the EM FX space, COP (+3.5% vs. USD), MXN (+1.6%), and PEN (+1.0%) have outperformed over the last week, while RUB (-7.2% vs. USD), HUF (-1.8% vs. EUR), and PLN (-1.8% vs. EUR) have underperformed.

1) Fiscal developments in China are noteworthy.  Although we look for some additional monetary accommodation from the PBOC, the government announced new initiatives on the fiscal front.  Officials have approved a CNY192 bln (~$31 bln) construction/infrastructure project.  It involves new roads in three provinces and CNY80 bln for a third airport near Beijing.  This news came after HSBC’s flash manufacturing PMI for China fell to 49.5 from 50.0.  This was a slightly larger decline than the market expected and follows on the heels of other disappointing data.  CNY 12-month NDF weakened to near 6.35, the weakest since November 2012.

2) Bank Indonesia intervened to lend the rupiah some support.  Indonesia is the latest EM country to show concern about recent currency movements.  In a press conference afterwards, Deputy Governor Adityaswara said the bank was comfortable with an exchange rate between 11900 and 12300.  We have always believed that policymakers should not identify any particular exchange rate levels, in order to keep an element of unpredictability.  The central bank also confirmed that it had recently bought local currency debt as well, though the amounts involved were small.

3) Czech central bank Governor Singer said he could “imagine” postponing the exit from the koruna cap.  At its December policy meeting, the central bank maintained its pledge to maintain the koruna cap until 2016, but this is the first time we see it flagging another extension.  However, the central bank has refrained from talking about an actual change in the EUR/CZK floor itself (currently “around” 27).

4) The Russian central bank hiked a key interest rate to 17.0% from 10.5%.   This was less than a week after the central bank hiked the rate by 100 bp.  When the 650 bp move did little to help the ruble, the Finance Ministry then announced that it would sell dollars along with the central bank.  The ruble remains extremely volatile.  Many fear that capital controls may be the next step for Russia.  Putin warned that the pressures on Russia could last up to two years. 

5) Turkey is seeing some renewed political intrigue.  Last weekend, police detained some officers and journalists thought to be sympathetic to cleric Gulen.  This did not go unnoticed by the EU, which noted the arrests of journalists violate its values.  Political tensions ratcheted up almost a year ago to the day.  While it has been quiet in recent months, these latest developments show the problems are long simmering. 

6) Turkey’s central bank announced it would meet FX demand from some state companies with direct sales, rather than having trades go through the spot market.  The central bank has also been allowing interbank rates to move higher as well.  Average cost of funding for banks has risen to 8.85%, the highest since June 27, and these moves come after the bank doubled the amount of daily dollar auctions to $40 mln.

7) Brazil central bank Governor Tombini informally announced that the FX swaps program would be extended.  The program is set to expire at the end of this year. He noted that new daily issuance will likely be between $50-200 mln, which supports our view that the swaps program is likely to get even bigger, not smaller.  Decreasing the swaps program is equivalent to buying USD, and would likely feed into even greater BRL losses.  While most would probably like to start shrinking the amount of outstanding swaps, it would be suicidal to do so in this market environment.

8) Colombian officials appear to be a bit more concerned about the weak peso.  Finance Minister Cardenas noted that the weakness has been “very rapid” and added that officials do not want “big leaps” in the exchange rate.  Finally, Colombia officials are learning to be more careful about wishing for a weaker currency.

Emerging Markets: What has Changed is republished with permission from Marc to Market