What Has Changed in EM

  • 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

In the EM equity space as measured by MSCI, Brazil (+6.9%), Qatar (+1.1%), and Czech Republic (+0.6%) have outperformed this week, while India (-6.0%), Indonesia (-5.5%), and Turkey (-5.5%) have underperformed. To put this in better context, MSCI EM fell -4.4% this week while MSCI DM fell -1.1%.

In the EM local currency bond space, Brazil (10-year yield -42 bp), Czech Republic (-4 bp), and Chile (flat) have outperformed this week, while Turkey (10-year yield +246 bp), Philippines (+57 bp), and Indonesia (+26 bp) have underperformed. To put this in better context, the 10-year UST yield rose 17 bp to 3.22%.

In the EM FX space, ARS (+9.1% vs. USD), BRL (+4.3% vs. USD), and ILS (+0.3% vs. USD) have outperformed this week, while ZAR (-4.2% vs. USD), COP (-2.1% vs. USD), and KRW (-1.9% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.8% this week.

India lowered retail fuel prices in an effort to offset the impact of rising crude oil prices. The move is clearly political, coming ahead of national elections next year. Of course, this has negative implications for the budget deficit. The federal government will cut the excise duty on gasoline and diesel fuel by INR1.5 per liter, according to Finance Minister Jaitley. In addition, state-run oil companies will reportedly cut prices by INR1 per liter while state governments have been asked to match the combined cuts.

RBI delivered a dovish surprise and kept rates steady. While inflation remains well-behaved, most (including us) thought that the bank would hike 25 bp to help support the rupee. By not hiking, the RBI sent a bad signal to the markets and we expect further rupee underperformance.

Polish central bank went from ultra-dovish to merely dovish. Governor Glapinski walked back earlier comments, noting that “I’ve never said rates will stay on hold until the end of 2020. I’ve said and I reiterate that with a huge probability, rates will remain stable until the end of 2019, and if nothing changes — even further.” Unofficially, we recall Glapinski hinting heavily at steady rates through 2020, but he is correct in that it was not official forward guidance.

More Russian sanctions appear likely. Dutch intelligence caught four alleged Russian GRU agents attempting a cyber-attack on the global chemical weapons watchdog located in the Netherlands. German officials confirmed that the EU is considering new sanctions on Russia over continued cyber-attacks. Elsewhere, US prosecutors indicted seven Russian GRU operatives on charges of hacking and fraud against targets that include Westinghouse and international anti-doping authorities.

Bahrain has obtained a $10 bln aid package from its Gulf allies. The aid will be spread over five years and will include loans, deposits, and grants. Saudi Arabia, UAE, and Kuwait have reportedly signed off on the package, which officials said would focus on Bahrain’s fiscal imbalances.

South Africa Finance Minister Nhlanhla Nene is coming under scrutiny. Testifying before an anti-graft commission, Nene revealed that he’d met privately with members of the Gupta family on numerous occasions at their house. This was a turnaround from previous statements that he only encountered the Guptas in passing at public gatherings. Nene is well-respected by the markets and so the optics are not good.

Most Brazilian polls show Bolsonaro’s support rising ahead of Sunday elections. However, his rejection rate remains the highest of all candidates (44% according to Datafolha though Haddad isn’t far behind at 40%) and so we doubt he can win in the first round, something that hasn’t been done since Cardoso in 1998. And, those same polls show Bolsonaro and Haddad in a dead heat in the second round, so this race really is too close to call.

Colombia central bank announced a new program to accumulate foreign reserves via the sale of put options. Officials said the program is not meant to target any particular exchange rate. Rather, it is meant to help prepare for a possible reduction in its Flexible Credit Line (FCL) with the IMF in 2020. The bank also said that it doesn’t have a target for how much will be accumulated in reserves, but that it doesn’t have to fully match the $11.4 bln size of the FCL.