What Has Changed in EM

  • Pakistan central bank hiked rates after devaluing the rupee for the fifth time this year
  • Bank of Israel hiked rates unexpectedly by 15 bp to 0.25%
  • Russia central bank Governor Nabiullina said it may resume FX purchases if market conditions remain stable
  • President-elect Bolsonaro appointed little-known Admiral Albuquerque as Energy and Mines Minister

In the EM equity space as measured by MSCI, China (+3.6%), Brazil (+3.3%), and Poland (+3.0%) have outperformed this week, while UAE (-4.9%), Egypt (-4.5%), and Malaysia (-1.0%) have underperformed. To put this in better context, MSCI EM rose 2.7% this week while MSCI DM rose 3.1%.

In the EM local currency bond space, Hungary (10-year yield -23 bp), Argentina (-16 bp), and Poland (-12 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Israel (+8 bp), and Colombia (+6 bp) have underperformed. To put this in better context, the 10-year UST yield fell 5 bp to 3.01%.

In the EM FX space, IDR (+1.7% vs. USD), INR (+1.6% vs. USD), and KRW (+0.9% vs. USD) have outperformed this week, while PKR (-3.4% vs. USD), BRL (-1.4% vs. USD), and RUB (-1.3% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.2% this week.

Pakistan central bank hiked rates after devaluing the rupee for the fifth time this year. The policy rate was hiked for the fourth straight meeting to 10% from 8.5% previously and was more than what the market expected. The rupee remains under pressure even as the government negotiates an IMF program. The bank noted that “Near term challenges to Pakistan’s economy continue to persist with rising inflation, an elevated fiscal deficit and low foreign exchange reserves.”

Bank of Israel hiked rates unexpectedly by 15 bp to 0.25%. We were very surprised, and thought the bank would wait until December, when new Governor Amir Yaron was in place. This meeting was led by acting Governor Nadine Baudot-Trajtenberg, as previous Governor Flug’s term had already ended November 13.

Russia central bank Governor Nabiullina said it may resume FX purchases if market conditions remain stable. Currently, those FX purchases have been suspended until after year-end in order to help manage ruble weakness.   The fact that the bank is thinking about resuming them suggests little concern about the exchange rate at current levels.

President-elect Jair Bolsonaro appointed little-known Admiral Bento Albuquerque as Energy and Mines Minister. Markets were disappointed it was not someone with more experience in this very important sector of the economy. Indeed, his cabinet is weighted heavily towards the military with very few having market experience. Albuquerque will have responsibility for auctioning offshore oil licensing as well as pushing through planned energy privatizations.