What Has Changed in EM

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1)    The AKP won a majority in the Turkish elections
2)    Colombia’s central bank unexpectedly hiked rates by 50 bps to 5.25% and added some new FX measures to its arsenal
3)    China will lift a freeze on IPOs by the end of the year
4)    Petrobras workers went on strike
5)    The National Bank of Hungary is turning to unconventional measures
6)    Czech central bank now sees an exit from the koruna cap as likely around the end of 2016
7)    Kazakhstan has a new central bank governor

In the EM equity space, China (+7.3%), Hungary (+3.3%), and Brazil (+3.1%) have outperformed over the last week, while South Africa (-1.9%), UAE (-1.8%), and Poland (-1.6%) have underperformed.  To put this in better context, MSCI EM rose 0.4% over the past week while MSCI DM was flat.

In the EM local currency bond space, Russia (10-year yield -34 bp), Indonesia (-24 bp), and Brazil (-16 bp) have outperformed over the last week, while the Philippines (10-year yield +41 bp), Poland (+22 bp), and South Africa (+16 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 17 bp over the past week.

In the EM FX space, IDR (+0.9% vs. USD), BRL (+0.6% vs. USD), and CZK (+0.2% vs. EUR) have outperformed over the last week, while ZAR (-2.1% vs. USD), MXN (-1.7% vs. USD), and ILS (-1.5% vs. USD) have underperformed.

1) The AKP won a majority in the Turkish elections.  The electoral result in Turkey were completely unexpected – by us, by all major polling companies, and by the vast majority of observers.  Now there are three remaining points of contention: (1) how the conflict with the Kurdish minority will develop, (2) whether Erdogan push for a constitutional change to enhance its presidential powers, and (3) whether economic policy changes. On the first, there have already been some positive signs suggesting that a peace deal could be at hand.  On the last, there have been press reports about a potential change to the central bank structure to make it more pro-growth.

2) Colombia’s central bank unexpectedly hiked rates by 50 bps to 5.25% and added some new FX measures to its arsenal.  Markets expected a 25 bp increase.  The decision to frontload the cycle was driven by concerns about the inflation outlook given the weaker currency and the effects of the El Nino on food prices. The bank also started a new FX options program to support the peso, where it will auction $500 mln whenever the peso rises by 7% or more than the 20-day moving average.

3) China will lift a freeze on IPOs by the end of the year. This suggests that confidence in the equity market rebound, or at least stability, is improving.  IPOs were suspended back in July.  China Securities Regulatory Commission official said new IPOs will resume after improvements are made to the listing system.  Since the announcement was made after China markets were closed, we will have to wait until Monday to see how they absorb the possibility of added supply.  Before the news, they had built on recent gains, with the Shanghai Composite up 1.9% and the Shenzen Composite up 2.8%.

4) Petrobras workers went on strike.  As if to add insult to injury, several of the Brazilian oil company’s unions decided to stop operations as a protest against the government’s recent actions.  The unions are calling for asset sales to be stopped, work on refineries to be resumed, local content rules maintained, a guarantee that Petrobras remain the sole operator in pre-salt offshore oil area, and a pay increase.  Oil production is likely to fall as a result of the strike, but officials say that there is no risk of fuel or gas shortages.

5) The National Bank of Hungary is turning to unconventional measures.  The bank has said it will keep rates at current levels through 2017, though central bank Vice President Nagy later said that it could keep current policy in place until 2019.  Nagy later said the bank would use interest rate swaps and other non-conventional tools to stimulate growth.  For example, it announced a new market-based lending scheme to support credit.

6) Czech central bank now sees an exit from the koruna cap as likely around the end of 2016.  Before, it had said the cap “around 27” would be kept until “at least” H2 2016, so the forward guidance from Czech central bank is a little more dovish.  The CEE region has gotten more concerned about deflation/growth risks, with the central banks of big three (Czech, Hungary, Poland) all tilting more dovish recently.

7)    Kazakhstan has a new central bank governor.  President Nazarbayev dismissed Governor Kelimbetov just three months after the currency moved to a float, and appointed a presidential advisor, Daniyar Akishev, to replace him.  The idea behind the replacement was to stem the “decrease in trust in the national bank and in the tenge.” But the opposite has happened. The tenge plunged in the wake of the announcement , down nearly 11% against the dollar since Monday.