Emerging Markets: BBH Market Strategists provide intra-day commentary on currency, economic and geopolitical developments in the emerging and frontier markets.
EM FX ended last week on a firm note but the week was still a bad one. We think risk-off impulses will continue and likely intensify in the coming weeks. As such, we remain negative on EM as an asset class. China will provide its first glimpse of October with PMI readings, while US jobs report Friday will be the data highlight of the week.
New Finance Minister Tito Mboweni will present his mid-term budget review this Wednesday. We think he will do just enough for the agencies to give him the benefit of the doubt until his next budget statement in early 2019. Longer-term, we see more downgrades and loss of investment grade from Moody’s.
Through mid-October 2018, foreign currency Uridashi issuance totaled $7.6 bln. If this pace is sustained, the full year total of $9.6 bln would represent an increase from $8.4 bln in 2017 but would fall short of the $12 bln issued in 2016.
The US Treasury will soon release its semiannual report to Congress on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” Speculation has grown that China will be named a currency manipulator, which would be the first time any country has been named since 1994. We do not think China will be named, which would be positive for Chinese assets as well as the wider EM.
Continue reading “Some Thoughts on the Upcoming US Treasury FX Report”
Jair Bolsonaro won the first-round elections in Brazil but did not have the requisite 50% support. As such, he and Fernando Haddad will go to the second-round vote will be held on October 28. With the rest of EM remaining under pressure, we do not think BRL can rally much further. However, it could continue to outperform from a relative standpoint.
We saw a significant EM positioning washout last week, with weak longs getting punished. Anyone lulled into jumping aboard the EM train recently is getting crushed by sharply higher US rates. ARS and BRL bucked the trend and gained last week, but all others were weaker and were led by ZAR, CLP, and COP. MSCI fell 4.5%, while EM bond yields surged. With US rates still marching higher, EM is likely to remain under pressure this week.