What Has Changed in EM

  • 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

In the EM equity space as measured by MSCI, Brazil (+3.1%), Hungary (+3.1%), and Qatar (+3.0%) have outperformed this week, while South Africa (-2.8%), Mexico (-2.2%), and India (-2.1%) have underperformed. To put this in better context, MSCI EM fell -0.9% this week while MSCI DM fell -0.1%.

In the EM local currency bond space, Argentina (10-year yield -172 bp), Brazil (-38 bp), and Turkey (-29 bp) have outperformed this week, while Pakistan (10-year yield +29 bp), Mexico (+9 bp), and Chile (+6 bp) have underperformed. To put this in better context, the 10-year UST yield rose 4 bp to 3.19%.

In the EM FX space, TRY (+3.8% vs. USD), BRL (+1.8% vs. USD), and RUB (+0.9% vs. USD) have outperformed this week, while MXN (-2.1% vs. USD), PKR (-1.1% vs. USD), and ILS (-0.9% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.2% this week.

The US Treasury decided not to label China (or any other country) a currency manipulator. This was the right call, and we are heartened by the fact that the US decided not to inflame tensions with China eve further. Still, Secretary Mnuchin expressed concern about recent yuan weakness as well as the lack of transparency with regards to FX policy.

China’s top finance officials worked to calm markets. Coordinated statements from the central bank, securities watchdog, and regulators helped Chinese equities rally. PBOC Governor Yi Gang said that the bank is studying measure to ease financing difficulties for Chinese firms and pledged to support credit expansion by banks. Other statements noted healthy stock valuations and strong economic fundamentals.

Malaysia cut its growth forecast and scrapped plans to balance the budget by 2020. The government now expects GDP growth to average 4.5-5.5% from 2018-2020 compared with an earlier target of 5-6%. The budget deficit is now estimated to widen to -3% of GDP compared with an initial plan to balance the budget in two years.

The IMF and Ukraine have reached a staff-level agreement on a new 14-month stand-by program. The new agreement totals $3.9 bln and replaces an existing $17.5 bln Extended Fund Facility. It will reportedly focus on fiscal consolidation, reducing inflation, and some structural reforms. The agreement is subject to IMF management and Executive Board approval.

Chile central bank started the tightening cycle with a 25 bp hike. The market was evenly split between no hike and a 25 bp hike to 2.75%. The economy is gaining strength even as inflation picks up. At 3.1% y/y in September, it is above the 3% target and so the bank felt comfortable starting the tightening cycle.

US-Mexico relations are tense due to reports of a refugee caravan heading north to the US. President Trump threatened to close the border, noting that illegal immigration is more important to him than trade with Mexico. We have to point out that closing the legal crossings where legal trade flows won’t do much to stop illegal border crossings.