What Has Changed in EM

  • China reportedly plans to enact broad tariff cuts
  • China will be able to sell bills in Hong Kong
  • Bank Indonesia plans to offer IDR-settled NDFs domestically
  • A second North Korea-US summit may be in the works.
  • Hungary central bank is laying the groundwork for exiting unorthodox policies
  • South African Reserve Bank tilted more hawkish
  • South Africa will redirect ZAR50 bln of spending as part of a plan to boost growth and create jobs
  • The Turkish government announced a plan to help support the banking sector, but details were lacking
  • Argentina is trying to increase its IMF program to as much as $70 bln from $50 bln currently
  • Brazil COPOM tilted more hawkish whilst leaving rates steady at 6.5

In the EM equity space as measured by MSCI, Brazil (+8.9%), Peru (+6.2%), and Chile (+4.6%) have outperformed this week, while Egypt (-5.9%), India (-3.5%), and Qatar (-2.4%) have underperformed. To put this in better context, MSCI EM rose 2.4% this week while MSCI DM rose 1.7%.

In the EM local currency bond space, the Philippines (10-year yield -65 bp), Brazil (-40 bp), and Indonesia (-27 bp) have outperformed this week, while Turkey (10-year yield +28 bp), Korea (+10 bp), and Singapore (+9 bp) have underperformed. To put this in better context, the 10-year UST yield rose 10 bp to 3.07%.

In the EM FX space, ARS (+5.5% vs. USD), ZAR (+4.4% vs. USD), and CLP (+3.3% vs. USD) have outperformed this week, while TRY (-1.7% vs. USD), CZK (-0.5% vs. EUR), and PHP (-0.3% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.6% this week.

China reportedly plans to enact broad tariff cuts. What does this mean? It suggests that China is buckling in for a protracted period of trade tensions with the US. By cutting tariffs on imports with its other major trading partners, China is making adjustments to offset the impact of its tariffs on US goods.

China will be able to sell bills in Hong Kong. The move will help policymakers add and drain offshore liquidity as needed to help influence the CNH exchange rate, as well as boost globalization of the yuan. PBOC and HKMA signed a memorandum to facilitate bill issuance in Hong Kong.

Bank Indonesia plans to offer IDR-settled NDFs domestically. The central bank has been bleeding reserves, so we’re not surprised that they are trying to support IDR without having to spend USD. On Thursday, BI meets and is widely expected to hike rates 25 bp to 5.75%. Some are looking for a 50 bp move. While we can’t rule that out, we think recent firmness in IDR gives them leeway to go with 25 bp.

A second North Korea-US summit may be in the works. North Korean President Kim Jong Un wants a second summit with President Trump soon, according to South Korean President Moon Jae-in. Moon just completed a three-day visit to North Korea. He added that Kim is willing to take faster steps on denuclearization if the US guarantees his regime’s safety.

Hungary central bank is laying the groundwork for exiting unorthodox policies. Whilst keeping rates steady at 0.9%, the bank said that it is “prepared for the gradual and cautious normalization of monetary policy, which will start depending on the outlook for inflation.” The bank will eliminate the 3-month deposit rate as the benchmark rate by year-end, which will be replaced by the required reserve level.

South African Reserve Bank tilted more hawkish. The vote was 4-3 in favor of keeping rates steady at 6.5%. With 3 dissenters in favor of hiking appearing for the first time this cycle, we saw a hawkish hold. Next and last meeting for 2018 is November 22, and we think much will hinge on the rand then.

South Africa will redirect ZAR50 bln of spending as part of a plan to boost growth and create jobs. The plan will focus on developing new infrastructure, with ZAR400 bln to be spent over the next three fiscal years. However, the measures are meant to be neutral for the deficit. Details of which areas will see spending cuts will be announced in the mid-term budget on October 24.

The Turkish government announced a plan to help support the banking sector, but details were lacking. Finance Minister Albayrak said the matter is still under study, adding that the policies will be formulated using “global examples and Turkish past experience.” Especially worrisome was the lack of any concrete plan to help corporates deal with their FX exposure. Others hoping for a “bad bank” plan were also disappointed. Growth forecasts were cut to 2.3% in 2019 and 3.5% in 2020 from 5.5% for both years previously.

Press reports suggest Argentina is trying to increase its IMF program to as much as $70 bln from $50 bln currently. Talks also include getting more IMF money sooner than expected. In return, the IMF is reportedly seeking a bigger commitment from the Macri government to pass reforms. Reports also suggest the two are discussing an unofficial trading band for the peso.

Brazil COPOM tilted more hawkish whilst leaving rates steady at 6.5%. The hawkish hold came as COPOM acknowledged that inflation risks have risen, and that the tightening cycle would begin if risks worsen. Language supports our view that COPOM hikes 50 bp at the next meeting October 31.