Emerging Market Idiosyncratic Risk Remains in Place

EM starts the week off on a mixed footing.  On the one hand, hints of ECB stimulus and actual PBOC stimulus last week suggest a more supportive global liquidity backdrop for EM and risk.  On the other hand, they are taking those moves due to downside growth risks.  For now, a tug of war between the two is likely to keep EM trading volatile.  Perhaps the final straw will be the US rate outlook, but expect nothing from the Fed this week.

EM starts the week off on a mixed footing.  On the one hand, hints of ECB stimulus and actual PBOC stimulus last week suggest a more supportive global liquidity backdrop for EM and risk.  On the other hand, they are taking those moves due to downside growth risks.  For now, a tug of war between the two is likely to keep EM trading volatile.  Perhaps the final straw will be the US rate outlook, but expect nothing from the Fed this week.

Meanwhile, idiosyncratic EM risk continues.  Poland’s opposition Law and Justice won an outright majority in parliament, and it threatens to pull policy towards a more populist trajectory.  In Argentina, opposition presidential candidate Macri did better than expected, forcing a second round run-off November 22.  Turkey holds elections this coming weekend, with polls suggesting another stalemate.  In Brazil, the impeachment drums continue to sound.  These developments add yet another wrinkle to an already difficult investment climate.  Despite what appears to be a more beneficial global liquidity backdrop, we remain negative on EM as an asset class.

Top Chinese officials meet in Beijing October 26-29 for the so-called fifth plenary session.  This key 4-day day policy meeting probably will not be market moving, but it typically drafts the country’s new Five-Year Plan, this one for the 2016-2020 period.  The first draft will reportedly be discussed at the December annual Central Economic Work Conference, with the final draft to be approved at the annual National People’s Congress in March 2016.  This Five-Year Plan is the first under President Xi Jinping’s leadership. 

Korea reports October consumer confidence Tuesday, which stood at 103 in September.  It then reports September IP Friday, and expects to rise 0.4% y/y vs. 0.3% in August.  Over the weekend, Korea reports October trade data.  Exports are seen at -14.5% y/y, and imports at -13.5% y/y.  We think downside risks will move the BOK to a more dovish stance in 2016, and the next rate cut becomes even more likely if the JPY/KRW cross continues to move lower.  After poking above 10 in August and September, that key cross is moving back towards nine.  It just broke below its 200-day MA near 9.32 Friday via a combination of a strong won and weak yen.

South Africa reports Q3 unemployment Tuesday, and is expected to rise to 25.1% from 25.0% in Q2.  It then reports September money (consensus 9.75% y/y) and private sector credit (consensus 8.5% y/y) data on Thursday, as well as PPI (3.5% y/y consensus).  On Friday, it reports September trade and fiscal data.  Budget gap is expected at –ZAR8 bln, which would push up the 12-month total for the fourth straight month.  We think ratings downgrades are getting more likely in light of the worsening debt and deficit trajectories.

Brazil reports September PPI on Tuesday, followed by October IGP-M wholesale inflation (10.2% y/y consensus) on Thursday.  COPOM minutes also come out on Thursday, and should provide some more information on why convergence with the inflation target pushed out to 2017 at that meeting.  September fiscal data reports Thursday (central government) and Friday (consolidated).  There are mixed market expectations, with the 12-month primary deficit seen narrowing but the 12-month nominal deficit seen widening. 

Mexico reports September trade Tuesday, and expects at -$1.4 bln vs. -$2.8 bln in August.  The central bank meets Thursday and it is widely expected to keep rates steady at 3%.  Mid-October inflation came in at another record low of 2.47% y/y, supporting our view that Banxico should not be in any hurry to tighten. 

Chile reports September IP (-0.8% y/y consensus) and retail sales (3.4% y/y consensus) Thursday.  Central bank minutes are out on Friday.  At this last meeting, the bank started the tightening cycle with a 25 bp hike to 3.25%.  As such, the minutes could provide some important clues to the bank’s intentions going forward.  We do not expect an aggressive tightening cycle.

Taiwan reports Q3 GDP Friday, and expects to be at -0.5% y/y vs. +0.5% in Q2.  Real sector data has been coming in weaker than expected.  IP and commercial sales both see deeper y/y contraction.  The nation is still flirting with deflation.  CPI rose 0.3% y/y in September, but this was the first positive reading since December 2014.  The central bank just started its easing cycle at the September quarterly policy meeting, and should continue cutting rates for several more quarters.

Turkey reports September trade Friday and expects to be at -$4 bln.  If that happens, the 12-month total would narrow to -$72.4 bln, which is the narrowest since December 2010.  Yet much of this has come from plunging imports, not strong exports.  The external accounts are in decent shape, but high inflation and a weaker lira are big risks for investors.  This weekend’s upcoming elections could result in another stalemate.

Russia central bank meets Friday and expects to cut rates 50 bp to 10.5%.  However, it is a divided market.  Of the 33 analysts polled by Bloomberg, 15 see no cut, 17 see a 50 bp cut to 10.5%, and 1 sees a 100 bp cut to 10%.  We think the easing cycle will resume, but this month may be too soon.

Poland reports October CPI Friday, and expects at -0.7% y/y vs. -0.8% in September.  Deflation risks are persistent, and we expect the incoming Law and Justice party to stack the MPC with doves early next year, when virtually all their terms expire.  If that happens, then the easing cycle is likely to resume in 2016.  For now, the markets will be watching to see Law and Justice prioritize which campaign promises.

Colombia central bank meets Friday and expects to hike rates 25 bp to 5%.  The central bank started the tightening cycle with a 25 bp hike to 4.75% in September.  Two straight months seems aggressive, but perhaps the bank would prefer to front-load its tightening.  Recent firmness in the peso suggests a small chance of a dovish surprise this week.

Both Caixin and official China PMIs will report this coming weekend.  In the past, China flash PMI from Caixin (formerly HSBC) came out on the same day as the Eurozone flash readings (reported last Friday).  They have discontinued the China flash reading.  Official PMI is at 50 vs. 49.8 in September, while Caixin PMI is at 47.7 vs. 47.2 in September.  China seems to be neutral/positive for global market sentiment, with risk of some more positive spillover if the PBOC eases again, (which we expect).

Emerging Markets: Preview of the Week Ahead is republished with permission from Marc to Market