EM ended the week on a firm note, which should carry over into this week. The biggest near-term risk to EM is the US jobs data on Friday, as the weekly claims data points to another strong gain. Otherwise, the global liquidity backdrop remains EM-supportive.
EM ended last week on a soft note. Perhaps the main driver was rising US yields, as markets become wary of a more hawkish Fed this Wednesday. Perhaps it was technical, as the EM rally became over-extended. Whatever the reasoning, the correction continued into the weekend and is likely to carry over to this week as well.
While we remain cautious on EM at such rich valuations, a significant correction (which we have not seen in quite some time) could make some assets more attractive. The global liquidity backdrop remains supportive of EM for now.
China’s central bank may be leaning less dovish, Turkey has a new central bank governor, Argentina issued external debt for the first time since it defaulted 15 years ago, Brazil’s lower house voted to impeach President Rousseff by a 367-137 vote
In the EM equity space, Russia (+2.7%), Indonesia (+1.9%), and UAE (+1.8%) have outperformed this week, while China (-3.0%), Taiwan (-1.9%), and Hungary (-1.2%) have underperformed. To put this in better context, MSCI EM fell -0.1% this week while MSCI DM rose 1.0%.
EM ended last week on a firm note. Given the absence of any Fed-specific risks or any major US data releases, that firmness could carry over into this week. The failure to reach an agreement in Doha by oil producers is weighing on some countries through lower oil prices, but the global liquidity story ultimately remains risk-supportive for the time being. China data last week was also helpful for market sentiment.
Bank Indonesia will use the 7-day reverse repo rate as its new benchmark policy rate, the ruling party in South Korea unexpectedly lost parliamentary elections, the Monetary Authority of Singapore eased monetary policy to recession settings, Turkey has nominated its next central bank chief, the Brazilian special lower house committee voted 38-27 in favor of impeachment, the first round of Peru’s presidential election was inconclusive
Some dovish signals from the Fed and a bounce in oil prices helped EM end last week on a firm note. This week, the US retail sales report could be important, and the same goes for CPI and PPI data too. The Fed’s Dudley, Kaplan, Harker, Williams, Lacker, Lockhart, Powell, and Evans all speak this week.
The Fed releases its Beige Book Wednesday for the upcoming FOMC meeting April 27. Within specific EM countries, risks remain in place. We continue to feel that markets are too optimistic regarding the impeachment process in Brazil.
In the EM local currency bond space, the Philippines (10-year yield -9 bp), Mexico (-5 bp), and Ukraine (-4 bp) have outperformed this week, while Peru (10-year yield +21 bp), Brazil (+18 bp), and Russia (+11 bp) have underperformed. To put this in better context, the 10-year UST yield fell -4 bp this week to 1.73%.
In the EM FX space, ARS (+2.3% vs. USD), RUB (+0.8% vs. USD), and HUF (+0.3% vs. EUR) have outperformed this week, while BRL (-2.7% vs. USD), MXN (-2.2% vs. USD), and ZAR (-2.1% vs. USD) have underperformed.
EM ended the week on a mixed note after posting strong post-FOMC gains. The bounce in risk seems likely to continue this week, with little on the horizon to derail it. Specific country risk remains in play, however, with heightened political concerns in Brazil and South Africa.
In the EM equity space, China (+5.1%), South Africa (+3.8%), and Turkey (+3.6%) have outperformed this week, while Thailand (-0.7%), Qatar (-0.7%), and Colombia (-0.3%) have underperformed. To put this in better context, MSCI EM rose 3.3% this week while MSCI DM rose 1.2%.
Over the past three decades, global interest in emerging markets has soared, and when the financial crisis of 2008 hit, emerging markets were largely thought to be the next engine of global growth.
Insofar as they have complied with this investor aspiration over the past few decades, they have also adopted a negative aspect of the developed economies to which they aspired: corporate leverage. As the corporate emerging giants of the developing world have grown, so too have they issued debt at disproportionately faster rates.
