EM enjoyed an extended rally last week, and it should carry over to the early part of the week. The Wednesday FOMC meeting poses a risk to EM, especially if markets continue to price in a more hawkish Fed. The dot plots and press conference will be very important. BOE and the Norges Bank meet this week, with the latter expected to deliver a 25 bp rate cut to 0.5%.
Risk sentiment ended last week on a strong note, and that should carry over into this week. The global liquidity backdrop remains positive for EM, with the ECB widely expected to add more stimulus on Thursday. In a similar vein, the Fed is widely expected to remain on hold until June.
1) China’s central bank announced a 0.5% cut in the required reserve ratio, 2) Moody’s cut the outlook on China’s Aa3 rating to negative from stable, 3) Argentina and the main holdouts agreed to a debt restructuring deal, 4) Brazilian press reported that a senator implicated both Rousseff and Lula in the corruption probe as part of a plea bargain, 5) Chile is cutting back government spending this year in response to low copper prices
EM ended last week on a soft note, due to a variety of both external and internal factors. Firm US data continue to support our call for resumed Fed tightening, and this gave the dollar a bit of a bid. With the dollar gaining against the majors, this spilled over into generalized dollar gains vs. EM as well. Weak data out of China this week poses a risk to EM, though we suspect that how China markets react will set the tone for the wider EM.
1) PBOC appears to have confirmed a somewhat easier monetary stance, 2) Malaysian Prime Minister Najib is consolidating his grip on power, 3) Hungarian central bank Vice Governor Nagy hinted at more rate cuts, 4) Press reports suggest South African Finance Minister Gordhan threatened to resign last week, 5) Brazil was downgraded to sub-investment grade by Moody’s, 6) Colombia’s central bank tweaked its FX intervention mechanism
We think that it is still too early to say whether Friday’s price action was simply profit taking ahead of the weekend, or the resumption of overall negative market sentiment. We think the global backdrop remains conducive for risk, at least near-term. China concerns are on the back burner, while markets are still skeptical about the prospects for Fed tightening. Commodity prices are the potential spoilers to a resume risk rally, as oil ended last week on a sour note.
1) Indonesia announced it will allow full foreign ownership in many local industries in an effort to boost foreign investment, 2) The Thai military government called a referendum on the new constitution on July 31, 3) Poland’s ruling Law and Justice party dropped its backing for candidate Wnorowski to join the MPC, 4) The IMF is starting to warn Ukraine, 5) Press reports suggest some slippage in Brazil’s fiscal consolidation efforts, 6) Mexico’s Finance Minister Videgaray acknowledged spending cut will be needed to maintain budgetary discipline, 7) Elsewhere, Mexico’
EM assets for the most part fared well last week, and positive sentiment should carry over into this week. China reported January foreign reserves over the weekend, and they fell less than expected to $3.231 bln. China markets are closed this week for the New Year holiday. While there should be little risk of negative headlines from the mainland, markets should watch how CNH trades in the offshore markets that are open.
1) China relaxed some rules on foreign capital flows, 2) Malaysian Prime Minister Najib is tightening his grip on power, 3) The Czech National Bank (CNB) has tilted more dovish, 4) Ukrainian Economy Minister Abromavicius resigned abruptly, throwing the ruling coalition into turmoil, 5) Argentina unexpectedly settled with holdout Italian investors, 6) Press reports suggest Brazil’s central bank is considering rate cuts later this year
As we suspected, the current EM bounce still has some legs. The BOJ’s surprise easing helped EM and risk end on last week on a strong note, and we expect that to carry over into this week. Within EM, we will start to see the first readings for January. The biggest risk perhaps is the jobs report on Friday. Soft US data has helped push out Fed tightening expectations, but a strong reading here could put it back on the radar screen.
