What Has Changed in EM

  • Philippines central bank said it will cut rates soon due to falling inflation
  • MAS cut its core inflation forecast for this year to 1-2% from 1.5-2.5% previously
  • Turkey’s government announced it will inject fresh capital into state-owned banks
  • Now that the election has passed, Turkey’s central bank is normalizing monetary policy
  • Benjamin Netanyahu and his Likud party appear to have won the Israeli elections.
  • Argentina’s government will reportedly freeze prices on some food items for six months
  • President Bolsonaro reportedly ordered Petrobras to cancel a planned increase in diesel fuel prices for “the greater good.”
  • Brazil pension reform looks more and more likely to be delayed
  • Ecuador expelled fugitive Julian Assange from its London embassy

In the EM equity space as measured by MSCI, Hungary (+3.3%), Qatar (+2.0%), and South Africa (+1.8%) have outperformed this week, while Turkey (-3.5%), Brazil (-3.0%), and Peru (-1.9%) have underperformed. To put this in better context, MSCI EM rose 0.5% this week while MSCI DM rose 0.3%.

In the EM local currency bond space, Chile (10-year yield -9 bp), Israel (-9 bp), and Pakistan (-9 bp) have outperformed this week, while Turkey (10-year yield +21 bp), Hungary (+20 bp), and Indonesia (+11 bp) have underperformed. To put this in better context, the 10-year UST yield rose 3 bp to 2.54%.

In the EM FX space, ARS (+3.8% vs. USD), MXN (+1.5% vs. USD), and RUB (+1.5% vs. USD) have outperformed this week, while TRY (-2.1% vs. USD), MYR (-0.6% vs. USD), and KRW (-0.3% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.3% this week.

Philippines central bank said it will cut rates soon due to falling inflation. Governor Diakno said that easing will be on the table as soon as the next policy meeting May 9, adding “It’s not a matter of whether we cut, it is when.” CPI rose 3.3% y/y in March, and April data will be released May 6.

MAS cut its core inflation forecast for this year to 1-2% from 1.5-2.5% previously. At the same time, it kept policy steady at its semiannual policy meeting, as expected. It noted that “Growth in the Singapore economy has eased” and that “Despite some pickup in labor costs, inflationary pressures are mild and should remain contained.” We see this dovish stance being maintained in October too.

Turkey’s government announced it will inject fresh capital into state-owned banks. It will also create two funds to take on some bad loans, according to Finance Minister Albayrak. To fund this, the government will issue TRY28 bln ($4.9 bln) of bonds and place them at state banks. Yet details were lacking, and markets were disappointed that the reform program wasn’t deeper.

Now that the election has passed, Turkey’s central bank is normalizing monetary policy. It is now back to offering funds to commercial banks at the 24% policy rate, rather than the 25.5% overnight lending rate that prevailed before the election. The offshore swap market has also normalized.

Benjamin Netanyahu and his Likud party appear to have won the Israeli elections. While early vote counts suggest the two parties both won 35 seats in the 120-seat Knesset, Likud has the easier path to forming a majority coalition. Likud and its natural right-wing allies are tipped to win 65 seats total, while the left-wing parties fared poorly. Horse-trading will now commence.

Argentina’s government will reportedly freeze prices on some food items for six months, or basically until after the elections. Apparently, up to 100 products could be on the list, and that 40 of them are in Argentina’s basic basket of goods. This is concerning, as price controls never end well. Yes, Macri has an election to worry about but such price controls harken back to the failed policies of the Kirchner/Fernandez era.

President Bolsonaro reportedly ordered Petrobras to cancel a planned increase in diesel fuel prices for “the greater good.” Petrobras had been moving to a more market-based pricing system, but this interference is a bad sign.

Brazil pension reform looks more and more likely to be delayed. Lower house President Maia warned President Bolsonaro that he needs to improve relations with Congress if he wants to pass the reforms. While Maia said that he supports the reforms, he was critical of the government’s approach so far.

Ecuador expelled fugitive Julian Assange from its London embassy. The move signals a desire by current President Moreno to improve relations with the US. Former leftist President Correa took a much more confrontational approach, allowing refuge to Assange back in 2012.