What Has Changed in EM

What Has Changed in EM

1) The Brazilian central bank had a record monthly loss on its FX swap operations in September
2) Also in Brazil, the impeachment process got a step closer
3) Indonesia cuts energy prices and electricity tariffs for the industrial sector
4) Vietnam’s central bank enacted new regulation to curb holdings of foreign currencies by businesses
5) There were two policy initiatives from China during the holiday

In the EM equity space, Indonesia (+9.1), Singapore (+7.4%), and Russia (+7.2%) have outperformed over the last week, while Qatar (+0.3%), Taiwan (+1.7%), and Czech Republic (+1.7%) have underperformed.  To put this in better context, MSCI EM rose 7.2% over the past week while MSCI DM rose 4.3%.

In the EM local currency bond space, Indonesia (10-year yield -76 bp), Russia (-62 bp), and Turkey (-60 bp) have outperformed over the last week, while Ukraine (10-year yield +24 bp), Brazil (+12 bp), and Singapore (+8 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 12 bp over the past week.

In the EM FX space, IDR (+9.2% vs. USD), RUB (+8.3 vs. USD), and MYR (+6.9% vs. USD) have outperformed over the last week, while PEN (flat vs. USD), PKR (+0.1% vs. USD), and EGP (+0.1% vs. USD) have underperformed.

The impetus for EM’s massive rally has been the change in the US monetary policy outlook.  Market participants are pushing Fed lit-off back from December into 2016, and that has fed a massive short-covering rally for commodities, EM assets, and risk in general.  We think it’s too early to call, and we will see two more US jobs reports before the December 16 FOMC meeting.  But until the US data starts cooperating, this current EM rally could persist for some time.

1) The Brazilian central bank had a record monthly loss on its FX swap operations in September.  According to local news sources, the bank took a R$38.6 bln ($9.9 bln) loss.  On the year, the accumulated losses have reached R$108.3 ($27.9 bln).  The losses come from the sharp depreciation of the real over the last few months, of course, but are still a relatively small number compared with the country’s FX reserves which stand at just over $370 bln.  

2) Also in Brazil, the impeachment process got a step closer. The Brazilian federal court (TCU) voted to reject the president’s 2014 fiscal accounts on the basis that it fudged the numbers to hide the deficit.  The issue now moves to the budget committee, and then it has to go through both houses of congress.

3) Indonesia cuts energy prices and electricity tariffs for the industrial sector. This is part of a wider economic reform package to shore up confidence in the country’s economy. The idea is to help attract investment and improve consumptions, and comes after a series of regulations cutting red tape and stale regulations.

4) Vietnam’s central bank enacted new regulation to curb holdings of foreign currencies by businesses.  The new rules require more documentation for FX transactions, including the amount, purpose, and duration of payments.  It also imposed stricter controls regarding the timing of settlement and payments between counterparties. The new rules lead to one of the biggest move in the tightly managed currency in 7 years, by about 1%.

5) There were two policy initiatives from China during the 1-week holiday.  First, it launched of its own payment system for cross-border yuan transactions.  This will provide yuan clearing and settlement services.  An estimated 19 banks are participating initially as direct participants, including affiliates of at least three non-Chinese banks.  Second, China will conform to the IMF’s Special Data Dissemination Standards (SDDS).  This is a statistical system that will improve transparency, and the decision to join is probably linked to China’s objective of being part of the SDR basket.