What Has Changed in EM

  • China confirmed it will lift retaliatory tariffs on US auto imports for three months effective January 1
  • Reserve Bank of India Governor Urjit Patel resigned
  • Russia central bank unexpectedly hiked rates 25 bp to 7.75%
  • A major bondholder group said it won’t support the government’s new buyback offer for bonds sold by the Mexico City Airport Trust

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France to Underperform as Downgrade Risk Rises

French President Macron has backtracked in the face of increasingly violent protests against his policies. While this may provide a temporary calm, we believe France will remain under pressure as protests continue and the macro backdrop worsens.

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Some Thoughts on US Yield Curve Inversion

A portion of the US yield curve has inverted. While this is not the typical inversion that presages a recession, markets are nevertheless on heightened alert. This piece will discuss the predictive power of an inverted yield curve as well as why we are not yet concerned that one will materialize.

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What Has Changed in EM

  • Pakistan central bank hiked rates after devaluing the rupee for the fifth time this year
  • Bank of Israel hiked rates unexpectedly by 15 bp to 0.25%
  • Russia central bank Governor Nabiullina said it may resume FX purchases if market conditions remain stable
  • President-elect Bolsonaro appointed little-known Admiral Albuquerque as Energy and Mines Minister

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EM FX Model For Q4 2018 UPDATE

  • The broad-based dollar rally stalled recently following the more dovish market take on the Fed
  • We believe markets are vastly underestimating the Fed’s capacity to tighten in 2019
  • MSCI EM FX is likely to eventually test the September low
  • Every EM currency is down in 2018
  • We see continued divergences within the asset class
  • Our 1-rated (strongest fundamentals) grouping for Q4 2018 consists of SGD, RUB, THB, CNY, and MYR
  • Our 5-rated (weakest fundamentals) grouping for Q4 2018 consists of RON, CLP, LKR, ARS, and TRY

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Some More Thoughts on the Fed’s Neutral Rate

Fed Chairman Powell roiled global markets yesterday in his speech before the New York Economic Club. Upon further consideration, markets may want to rethink the knee-jerk reaction. This piece explains why.

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Bank of Korea Meets as Downside Risks Grow

Bank of Korea meets Friday and may resume its tightening cycle. However, it’s a tough call and we see risks of a dovish surprise as the economy struggles with growing headwinds. Political risk remains high too as North-South relations are in a sort of limbo.

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Where Do We Stand With Regards to the Dollar Rally?

We think that the market is overreacting to two Fed speeches and underreacting to ongoing firmness in the US data. Yes, the US economy is slowing but nothing beyond what was within expectations. Growth, while slowing from the blistering 4.2% SAAR pace in Q2, is still robust.

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EM Preview for the Week Ahead

EM FX caught a bid last week as markets took Fed comments to be on the dovish side. Given how firm the US data have been of late, we do not agree with the newly prevailing view that the Fed will be more cautious. However, we must respect the price action and so this dollar correction will likely extend until the market’s Fed view reverses again.

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