What Has Changed in EM

  • China confirmed it will lift retaliatory tariffs on US auto imports for three months effective January 1
  • Reserve Bank of India Governor Urjit Patel resigned
  • Russia central bank unexpectedly hiked rates 25 bp to 7.75%
  • A major bondholder group said it won’t support the government’s new buyback offer for bonds sold by the Mexico City Airport Trust

In the EM equity space as measured by MSCI, Egypt (+5.2%), Hungary (+2.5%), and India (+1.6%) have outperformed this week, while Russia (-3.6%), Colombia (-3.6%), and Turkey (-3.0%) have underperformed. To put this in better context, MSCI EM fell -1.0% this week while MSCI DM fell -0.5%.

In the EM local currency bond space, Brazil (10-year yield -24 bp), Poland (-12 bp), and Argentina (-11 bp) have outperformed this week, while Turkey (10-year yield +68 bp), South Africa (+16 bp), and Hungary (+14 bp) have underperformed. To put this in better context, the 10-year UST yield was flat at 2.90%.

In the EM FX space, PEN (+0.5% vs. USD), CZK (+0.2% vs. EUR), and BRL (+0.2% vs. USD) have outperformed this week, while ARS (-2.3% vs. USD), ZAR (-1.9% vs. USD), and CLP (-1.8% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.8% this week.

China confirmed it will lift retaliatory tariffs on US auto imports for three months effective January 1 as talks between the two continue. Press reports also suggest China will delay some targets in its “Made in China 2025” plan, which has become a lightning rod in US-China relations. Other reports suggest China is boosting purchases of US soybeans this week and is considering restarting purchases of US corn soon.

Reserve Bank of India Governor Urjit Patel resigned. The central bank and the government had been feuding over the RBI’s independence, but all signs had pointed to a truce. Patel served only half his term and was well-respected by the markets. Now, investors must wonder if Modi appointee Shaktikanta Das will turn out to be more compliant. Going into an election year, the government will likely continue to lean on the RBI to loosen its lending curbs.

Russia central bank unexpectedly hiked rates 25 bp to 7.75%. The market was split. Of the 42 analysts polled by Bloomberg, 26 saw no hike and 16 saw a 25 bp hike to 7.75%. CPI rose 3.8% y/y in November, just below the 4% target and rising. The bank forecasts inflation rising to 5.0-5.5% at end-2019, suggesting more hikes will be seen next year. The bank also said that it would resume its regular FX purchases starting January 15.

A major bondholder group said it won’t support the government’s new buyback offer for bonds sold by the Mexico City Airport Trust. Those bonds had jumped on earlier reports that the government had sweetened its initial buyback offer. After the new terms were announced, S&P kept these bonds on CreditWatch with negative implications.