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.
- The US Treasury decided not to label China (or any other country) a currency manipulator
- China’s top finance officials worked to calm markets
- Malaysia cut its growth forecast and scrapped plans to balance the budget by 2020
- The IMF and Ukraine have reached a staff-level agreement on a new 14-month stand-by program
- Chile central bank started the tightening cycle with a 25 bp hike
- US-Mexico relations are tense due to reports of a refugee caravan heading north to the US Continue reading “What Has Changed in EM”
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.
- Press reports that Trump and Xi will meet on the sidelines of the G20 meeting next month
- Pakistan has formally requested an IMF program
- The Monetary Authority of Singapore tightened policy at its semiannual meeting
- South Africa has a new Finance Minister
- Turkish courts convicted US pastor Andrew Brunson, but he was then freed
- Brazil polls are showing Jair Bolsonaro opening up a big lead over Fernando Haddad
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.
- India lowered retail fuel prices in an effort to offset the impact of rising crude oil prices
- RBI delivered a dovish surprise and kept rates steady
- Polish central bank went from ultra-dovish to merely dovish
- More Russian sanctions appear likely
- Bahrain has obtained a $10 bln aid package from its Gulf allies
- South Africa Finance Minister Nhlanhla Nene is coming under scrutiny
- Most Brazilian polls show Bolsonaro’s support rising ahead of Sunday elections
- Colombia central bank announced a new program to accumulate foreign reserves via the sale of put options