What Has Changed in EM

  • US-China relations appear to be thawing
  • People’s Bank of China cut reserve requirements by one percentage point
  • Bank of Thailand discussed lowering its inflation target
  • Turkish tanks have reportedly been deployed on the Syrian border.
  • Mexico Finance Ministry confirmed that it spent about $1.23 bln to hedge its 2019 oil revenues

In the EM equity space as measured by MSCI, China (+5.2%), Singapore (+5.1%), and Taiwan (+4.8%) have outperformed this week, while Egypt (-1.6%), Peru (-0.4%), and Czech Republic (+0.3%) have underperformed. To put this in better context, MSCI EM rose 3.8% this week while MSCI DM rose 2.6%.

In the EM local currency bond space, Argentina (10-year yield -182 bp), Indonesia (-11 bp), and Colombia (-11 bp) have outperformed this week, while Mexico (10-year yield +17 bp), India (+14 bp), and Hong Kong (+14 bp) have underperformed. To put this in better context, the 10-year UST yield rose 14 bp to 2.70%.

In the EM FX space, COP (+1.8% vs. USD), IDR (+1.6% vs. USD), and CNY (+1.6% vs. USD) have outperformed this week, while TRY (-2.5% vs. USD), INR (-1.1% vs. USD), and HUF (-0.1% vs. EUR) have underperformed. To put this in better context, MSCI EM FX rose 0.8% this week.

US-China relations appear to be thawing. Vice Premier Liu He will reportedly visit Washington DC January 30-31 for the next round of trade talks. Liu would likely meet with USTR Lighthizer and Treasury Secretary Mnuchin. Talks this week in China were extended a day, further signaling potential progress.

People’s Bank of China cut reserve requirements by one percentage point. The cut will be implemented in two steps of 50 bp each on January 15 and 25. According to the PBOC, the cut will release a total CNY1.5 trln into the banking system. Press reports also suggest the government is prepared to widen the budget deficit this year to help stimulate the economy.

Bank of Thailand discussed lowering its inflation target. The central bank said in its quarterly Monetary Policy Report that it discussed reducing the 1-4% target range but decided against doing so this year. CPI rose only 0.4% y/y in December.

Turkish tanks have reportedly been deployed on the Syrian border. With US troops now withdrawing, it would appear that Erdogan is preparing an imminent attack on the Syrian Kurds. Regional political risk remains high.

Mexico Finance Ministry confirmed that it spent about $1.23 bln to hedge its 2019 oil revenues. It has reportedly locked in hedges at $55 per barrel, which is the price approved by lawmakers for the 2019 budget.