What Has Changed in EM

Blog icons-EMchanged1) Mauricio Macri, the mayor of Buenos Aires, won the Argentine presidential election with 52% of vote

2) The latest political developments in Brazil rocked asset prices

3) The Brazilian central bank kept rates on hold at 14.25%, as expected, but two members called for a 50 bp hike

4) China markets are under pressure after reports that the three top brokers are under investigation as part of the larger anti-corruption campaign

5) Malaysia’s embattled 1MDB investment fund found a buyer

6) The Hungarian Central Bank purchased a majority stake in country’s stock exchange

7) The Nigerian central bank surprised markets with a 200 bp cut in the benchmark rate

8) A recent poll shows that Mexican President Pena Nieto’s popularity is back on the rise

In the EM equity space, Hungary (+2.3%), Korea (+2.0%), and Malaysia (+1.2%) have outperformed over the last week, while China (-5.8%), Turkey (-5.6%), and Poland (-3.4%) have underperformed. To put this in better context, MSCI EM fell -1.8% over the past week while MSCI DM fell -0.1%.

In the EM local currency bond space, Poland (10-year yield -10 bp), Thailand (-9 bp), and Singapore (-7 bp) have outperformed over the last week, while Turkey (10-year yield +28 bp), Russia (+20 bp), and Mexico (+17 bp) have underperformed. To put this in better context, the 10-year UST yield fell -6 bp over the past week.

In the EM FX space, MYR (+0.8% vs. USD), KRW (+0.1% vs. USD), and CZK (+0.1% vs. EUR) have outperformed over the last week, while TRY (-3.0% vs. USD), ZAR (-2.5% vs. USD), and RUB (-2.1% vs. USD) have underperformed.

 

1) Mauricio Macri, the mayor of Buenos Aires, won the Argentine presidential election with 52% of vote. Daniel Scioli, representing continuity of the Kirchner government, took 48% of the votes. The results were in line with the polls. Now attention turns to the cabinet and his inauguration on December 10. Macri ran on a center-right platform, so let’s see how forcefully he will keep to his campaign promises and what will happen with the currency. Still, there is certainly room to be optimistic.

2) The latest political developments in Brazil rocked asset prices. In short, the police arrested three important figures: the leader of ruling PT in the senate, Delcidio Amaral; an agribusiness baron, Jose Carlos Bumlai, who is very close to former president Lula; and Andre Esteves, CEO of the investment bank BTG Pactual. There are two possible consequences from this that could concern markets. First, the arrest of such a powerful figure in the PT could create headwinds and reverse the relatively favourable political moment the government is experiencing, curbing its chances to push through fiscal measures. Second, some could grow concerned about systemic risks stemming from the BTG story. We think there are some grounds for concluding the first, but very little to support the second. Either way, it’s too soon to tell.

3) Separately, the Brazilian central bank kept rates on hold at 14.25%, as expected, but two members called for a 50 bp hike. This split vote substantiates the shift by investors towards less easing/more hikes reflected in the swaps curves and recent surveys. But the statement provided no new information or discussion on the topic, so we will have to wait for the COPOM minutes on December 3.

4) China markets are under pressure after reports that the three top brokers are under investigation as part of the larger anti-corruption campaign. News that corporate profits fell 4.6% in October after a 0.1% decline in September also weighed on investor sentiment. Elsewhere, the dollar rose to two-month highs against the yuan, while the gap between the offshore (CNH) and onshore (CNY) yuan widened to about 0.9%. This is the widest since early September. Although the PBOC is thought to have tried to minimize the gap before it reached this magnitude in the past, its agents have not been seen. Perhaps some of the tolerance is linked to speculation ahead of Monday’s IMF decision. That the yuan is included seems to be a forgone conclusion. The issue now is the weight it is given in the basket.

5) Malaysia’s embattled 1MDB investment fund found a buyer. Mired in a corruption scandal, the government managed to get a $2.3 bln deal with China to buy its power assets. This is an important step towards winding down the fund, but the political situation remains very difficult and far from being resolved. The fund is under investigation in Malaysia, the United States, Singapore, Abu Dhabi, and Switzerland.

6) The Hungarian Central Bank purchased a majority stake in country’s stock exchange. The statement was titled “Budapest Stock Exchange once again in Hungarian hands.” The bank justified the move by trying to foster greater new share issuance and turnover, claiming that it no longer fulfilled its roll of allocating capital. Trading volumes on the bourse declined to $6 bln in 2014 from as high as $34 bln seven years earlier. The bank paid HUF13.2 bln forint ($45.1 mln) for the 68.8% combined stake of Austria’s CEESEG AG and Oesterreichische Kontrollbank AG.

7) The Nigerian central bank surprised markets with a 200 bp cut in the benchmark rate. The rate is now at 11.0%, and the cash reserve ratio was cut from 25% to 20%. Eight of out ten MPC members voted for the cut. The move is noteworthy, given that most of the central banks in Africa are tightening policy. Nigerian CPI rose 9.3% y/y in October, near the cycle highs. Furthermore, lower rates won’t help the naira, which has been pegged at what most see as an unsustainable level as oil prices continue to slide. The move continues the trend of unpredictable policy under President Buhari.

8) A recent poll shows that Mexican President Pena Nieto’s popularity is back on the rise. An El Universal poll showed that his approval rating rose 7 percentage points compared to the August reading to 42%, even if 51% disapprove of his government. This is likely do to the effects of social programs and the lessening of the negative popularity impact of the escape of El Chapo, a high profile drug lord.