What Has Changed in EM

  • MSCI will raise the index weight of China A-shares in its EM index
  • Pakistani-India tensions remain high after Pakistan downed two Indian jets in Kashmir
  • The US-North Korea summit in Hanoi ended badly
  • Poland ruling Law and Justice Party announced a big round of fiscal stimulus ahead of the elections
  • Israel Attorney General Mandelblit formally notified Prime Minister Netanyahu that he plans to charge him with bribery, fraud, and breach of trust
  • Nigerian President Buhari was declared the winner of last weekend’s election
  • Argentina central bank will tighten policy
  • Brazil announced the auction date for a group of deep-water oil fields

In the EM equity space as measured by MSCI, Colombia (+1.8%), India (+0.9%), and China (+0.9%) have outperformed this week, while Chile (-4.9%), Egypt (-4.8%), and the Philippines (-4.0%) have underperformed. To put this in better context, MSCI EM fell -0.6% this week while MSCI DM rose 0.3%.

In the EM local currency bond space, Chile (10-year yield -34 bp), Indonesia (-9 bp), and Mexico (-8 bp) have outperformed this week, while Poland (10-year yield +21 bp), Hungary (+9 bp), and China (+6 bp) have underperformed. To put this in better context, the 10-year UST yield was up 4 bp to 2.74%.

In the EM FX space, PLN (+0.7% vs. EUR), PHP (+0.7% vs. USD), and HUF (+0.6% vs. EUR) have outperformed this week, while TRY (-1.5% vs. USD), THB (-1.5% vs. USD), and ZAR (-1.5% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.2% this week.

MSCI will raise the index weight of China A-shares in its EM index. The increase will reportedly be carried out in three steps beginning in May, with the weighting of Chinese A-shares eventually rising to 3.3% of MSCI EM in November from 0.72% currently.

Pakistani-India tensions remain high after Pakistan downed two Indian jets in Kashmir. However, there are some signs that a deeper or wider conflict may be avoided. Pakistan announced the release of the captured India pilot. The situation remains fluid but at this point, the conflict seems unlikely to have an impact on global markets.

The US-North Korea summit in Hanoi ended badly. President Trump said he walked out on Kim Jong-un after US demands were rejected. Since the first summit in Singapore, there had been little progress, while the summit itself was hastily planned. As with all things North Korea, any market impact is likely to be short-lived.

Poland ruling Law and Justice Party announced a big round of fiscal stimulus ahead of the elections. The stimulus package could cost the government more than PLN40 bln ($10.5 bln) per year. According to a senior government official, a cut in the personal income tax rate for workers under 26 years will cost PLN2-3 bln per year, while lower tax rates and increased deductions for personal income tax will cost PLN7-10 bln zloty per year. New benefits for pensioners will cost PLN9-10 bln, while additional child benefits will cost PLN18.5 bln zloty per year.

Israel Attorney General Mandelblit formally notified Prime Minister Netanyahu that he will be charged with bribery, fraud, and breach of trust. This comes a little over a month before the April 9 elections. Before any indictment is filed, Netanyahu is entitled to a hearing to refute the charges. After that, Mandelblit would then make a final decision on whether to indict Netanyahu.

Nigerian President Buhari was declared the winner of last weekend’s election. The margin of victory was 56-41%, higher than the 54-45% margin in the previous election four years ago. Opposition leader Abubakar said he will mount a legal challenge, claiming a conspiracy between the election commission and the ruling party.

Argentina central bank will tighten policy. It announced that it will reduce the monetary base target for the March-May period by ARS43 bln ($1.1 bln). Also, the bank announced that if the exchange rate is below the currency band in March, it will reduce the amount of daily dollar purchases to a maximum of $50 mln from the current $75 mln. This was just increased back in late January.

Brazil announced the auction date for a group of deep-water oil fields. The Energy and Mining Ministry set the auction for October 28. The eventual winners will have to compensate state-controlled Petrobras for any investments it has already made in the offshore areas. Foreign oil companies including Exxon Mobil and Royal Dutch Shell have expressed interest in bidding.