All eyes are on the US Federal Reserve, which is expected to raise interest rates for the first time in nearly a decade. Since the financial crisis in 2008, the US, along with the Eurozone, UK and Japan have held their interest rates close to zero and used quantitative easing to flood financial institutions with capital.
EM starts the FOMC week off on a soft footing. Besides the prospects of Fed liftoff Wednesday, oil prices are making new cycle lows. Uncertainty about China’s FX policy is also making markets nervous, though we think this concern is misplaced. Overall, the global backdrop for EM remains very negative and we do not see much chance for a rebound after Fed lift-off. In recent days, USD has made new all-time highs against COP, MXN, and ZAR. Others are likely to follow suit in the coming weeks.
1) South African President Jacob Zuma fired Finance Minister Nene and replaced him with little-known ANZ lawmaker David Van Rooyen; 2) S&P revised the outlook on South Africa’s BBB- rating from stable to negative; 3) People’s Bank of China announced the publication of a new CNY basket on its website; 4) Moody’s put Brazil’s Baa3 rating on review for possible downgrade; 5) Brazil’s Supreme Court suspended for a week the creation of the congressional impeachment committee; 6) Relations between Brazil Vice President Temer and President Dilma Rousseff have dete
The US dollar is confined to narrow ranges against the euro and sterling after pushing higher yesterday. The greenback is staging stronger upticks against the yen but is struggling to resurface above previous support in the JPY122.25 area.
Weak commodity prices and the loss of upside momentum have seen profit-taking in the Australian and New Zealand dollars. The Canadian dollar remains heavy. The US dollar has extended its gains to new multi-year highs. It began the week near CAD1.3360 and is currently trading near CAD1.3660.
EM starts the week off in the familiar position of coming under pressure. The strong US jobs report has all but cemented a Fed lift-off this month, helping the dollar to claw back some of its post-ECB losses. Meanwhile, commodities continue to sink under the prospects of increased supply. Brent oil in particular is making new cycle lows after last week’s OPEC meeting saw the quota system basically scrapped. These factors all continue to conspire against EM assets in a broad fashion.
1) The Chinese yuan will be in the SDR. 2) Brazil had one of the most important weeks of the year, and possibly of its history. 3) Russia enacted sanctions against Turkey, while Turkey got a deal from the EU. 4) Moody’s raised Russia’s credit-rating outlook to stable from negative.
In the EM equity space, China (+2.6%), Taiwan (0.0%), and Israel (+0.0%) outperformed over the last week, while Poland (-5.4%), South Africa (-4.6%), and Chile (-3.3%) have underperformed.
After the island sustained severe damage in a tropical storm, Dominica’s economy has suffered horrendously. To assess the full extent of the damage, the World Bank, United Nations, and other development partners with funding support of the European Union (EU) and the World Bank Global Facility for Disaster Reduction and Recovery put their resources together to study the problem. What they found proved shocking.
This is set to be one of the most important weeks of the year. EM is likely to take a backseat between the ECB monetary policy decision, the OPEC meeting, and the US jobs report. That said there are several potential sources of idiosyncratic risk on which to keep an eye.
In the EM equity space, Hungary (+2.3%), Korea (+2.0%), and Malaysia (+1.2%) have outperformed over the last week, while China (-5.8%), Turkey (-5.6%), and Poland (-3.4%) have underperformed. To put this in better context, MSCI EM fell -1.8% over the past week while MSCI DM fell -0.1%.
EM starts the week on an uncertain footing. Commodity prices were off sharply until comments by Saudi Arabia lifted them, reversing the trend in commodity-sensitive assets. The dollar is also back on the rise, pressuring EM FX even as a December FED hike is now just about fully priced in. In South America, the victory of the market-friendly candidate in Argentina and better political winds in Brazil have also given the region some hope for the near term, which could help sentiment more broadly.
