Category: Emerging Markets

This Week in the Emerging Markets

Falling commodity prices and better US economic data are the biggest macro drivers for EM, overriding just about all idiosyncratic variables – perhaps with the exception of the weaker yen for Korea. We note that aside from the huge fall of over 40% in the price of Brent oil from its highs, iron ore is down about 50% this year. Brazil, China and India are the biggest EM producers of iron ore. Markets are also becoming apprehensive of the parabolic rise in Chinese equities, in part due to expectations for further easing, which could be dashed just as fast as they have been created.

An Emerging Markets Review

1) Some EM policymakers are becoming more worried about weak currencies 

2) The PBOC failed to drain liquidity for the past three sessions, fueling speculation of a cut in reserve requirements 

3) The Reserve Bank of India keep rates unchanged, but indicated potential easing for the first time this cycle 

4) Last weekend’s elections in Taiwan resulted in a stunning loss of the ruling Kuomintang

5) Israel Prime Minister Netanyahu will seek early general elections, likely strengthening the right wing of the party

A Preview of this Week’s Events Among the Emerging Markets

With the broader dollar appreciation trend losing steam in last several weeks, the fall in oil prices has become the main external variable determining EM performance.  Russia, of course, is the weakest link amongst the major EM countries, but Malaysia and Colombia are also coming under pressure.  Even Mexico, which has hedged much of its near-term exposure to oil prices, is looking materially more fragile as investors consider that cheaper energy is here to stay.

Emerging Markets Over the Last Week

1) Oil prices have taken another sharp leg down 

2) The People’s Bank of China surprised the markets with rate cuts last Friday 

3) Malaysia cut fuel subsidies just days after Indonesia’s new President Joko Widodo took similar measures 

4) Nigeria devalued the naira, moving the peg rate and widening the band around that rate to +/- 5% from +/- 3% previously 

5) Joaquim Levy will be the new Finance Minister for Brazil

A Preview of this Week’s Events Among the Emerging Markets

The huge reversal last week in the underperforming currencies (BRL and RUB) has put some of the bears on the defensive. In addition, the recent political news (except for Mexico) has been positive: Indonesia’s increase in subsidized fuel prices was followed by similar action in Malaysia; Brazil’s financial team looks solid (on paper at least); and the surprise interest rate cut by China sends an important signal of support for EM and commodities.

The Latest in the Emerging Markets

1) Peace talks in Colombia are becoming more tenuous 

2) Brazil still doesn’t have an economic team, but there is a frontrunner 

3) Center-right candidate Klaus Iohannis won the Presidential election in an upset result 

4) Indonesia’s government finally raised its subsidized fuel price 

5) Mexico and Russia’s bond sales yielded vastly different results 

A Preview of this Week’s Events Among the Emerging Markets

There were few notable developments out of the G20 meeting that would directly impact EM markets.  However, the escalating tensions with Russia made evident in the meeting have increased to the point that it could again lead to spillover effects. Separately, the political climate in Brazil is heating up again and starting to feel like a “3rd round” in the electoral dispute.  President Dilma is coming under huge pressure to appoint a finance minister, while the corruption scandal surrounding Petrobras deepens further.

The Latest in the Emerging Markets

1) Hong Kong indicated it would lift the CNY20k limit for daily currency limit for Hong Kong residents 

2) Moody’s upgraded the outlook on Hungary’s Ba1 rating from negative to stable 

3) South African politics are heating up 

4) Moody’s downgraded South Africa to Baa2 and the outlook was changed from negative to stable 

5) There are press reports that Brazil’s President Rousseff will pick former central bank head Meirelles as her new Finance Minister, but this is not at all a given 

Emerging Market Assets Lacking a Defined Direction

Emerging market assets, in general, are lacking a defined direction. The fall in commodity prices seems to be stabilizing, for now at least, but the impact of the large level shift is still to be felt globally. Meanwhile, the dollar appears to be consolidating, which will reduce the pressure on EM assets. We do think the dollar uptrend remains intact, and should continue to hurt EM in the coming weeks. Asian countries, especially Korea, are still adjusting to the rapid depreciation of the yen, and if it continues, there will be action for sure. 

A Review of the Emerging Markets

1) The won-yen story is back after Vice Finance Minister Hwan stated that authorities will manage won moves in line with the yen

2) Poland unexpectedly paused its easing cycle; separately, Poland wants to reduce the size of its Monetary Policy Council from 10 to 7

3) The Russian central bank changed its intervention regime after it became clear that the rate hike was ineffectual

4) Politics are heating up again in Ukraine

5) Brazil released the minutes from last week’s meeting