What Has Changed in Emerging Markets

In this edition of MarketView we take a look at some notable changes within Emerging Market.

1. The BRICS central banks sign an accord on $100 bln foreign currency pool.
2. South African union AMCU declared a dispute with gold producers over wages.
3. China’s recent actions to stabilize equity markets became increasingly desperate.
4. Argentina local elections gave the opposition a solid victory.
5. Brazil’s central bank pared the amount of FX swaps rollover late last week.
6. The approval of Chile’s President Michelle Bachelet’s continues to fall.

In the EM equity space, China (+5.7), Turkey (+2.5%), and Czech Republic (+1.3%) have outperformed over the last week, while Taiwan (-4.7%), Hong Kong (-4.5%), and Korea (-3.5%) have underperformed. To put this in better context, MSCI EM fell -3.3% over the past week while MSCI DM fell -0.2%.

In the EM local currency bond space, Ukraine (10-year yield -47 bp), Singapore (-13 bp), and Thailand (-13 bp) have outperformed over the last week, while Brazil (10-year yield +10 bp), Indonesia (+9 bp), and Malaysia (+6 bp) have underperformed. To put this in better context, the 10-year UST yield rose 1 bp over the past week.

In the EM FX space, HUF (+1.2% vs. EUR), TRY (+1.0% vs. USD), and PLN (+0.5% vs. EUR) have outperformed over the last week, while BRL (-1.8% vs. USD), CLP (-1.6% vs. USD), and EGP (-1.2% vs. USD) have underperformed.

1. The BRICS central banks sign an accord on $100 bln foreign currency pool. China will contribute $41 bln, while Brazil, India, and Russia will give $18 bln each. South Africa will contribute $5 bln. A statement said that the pool is meant to ensure provision of USD in case of liquidity problems in the member states. From what we can tell, this is similar to the repo lines set up under the Chiang Mai Initiative, making dollars available for borrowing. We never put much stock in the swap lines because they were really temporary credit lines and didn’t really add to the firepower of the central banks that participated. Still, we think this is a good indicator that EM policymakers are starting to gear up for further currency losses by putting more firewalls and circuit-breakers into place.

2. South African union AMCU declared a dispute with gold producers over wages. Note that wage talks in the gold mining sector have been ongoing since late June. Five gold producers (AngloGold Ashanti, Evander Gold Mines, Harmony, Sibanye Gold and Village Main Reef) are negotiating with four trade unions (the Association of Mineworkers and Construction Union (AMCU), National Union of Mineworkers (NUM), Solidarity, and Uasa). No surprise, the unions are asking for big wage hikes even as the gold producers struggle with slumping prices. Expect labor unrest to pick up, as unemployment remains stuck above 25%.

3. China’s recent actions to stabilize equity markets became increasingly desperate. More and more measures were rolled out as the week progressed and losses mounted, but the equity markets finally stabilized going into the weekend. However, nearly half the mainland stocks are still locked up and unable to trade. As such, we cannot yet sound the all clear. China’s heavy-handed meddling in the local equity markets may ultimately derail its bid to have A-shares included in MSCI’s indices.

4. Argentinian local elections gave the opposition a solid victory. The capital Buenos Aires and the second biggest city, Cordoba, were won by the opposition. Despite the investment of political capital by President Kirchner, the defeats were expected.

5. Brazil’s central bank pared the amount of FX swaps rollover late last week. After rolling them over at a pace of 7,100 contracts per day, the bank last Thursday slowed the pace to 6,000 contracts per day. If this pace is maintained until the end of the month, the central bank will roll over 60% of the total, leading to a decrease its short position in FX swaps by around $4.3 bln.

6. The approval of Chile’s President Michelle Bachelet’s continues to fall. The last poll showed a decline to 27% from 29% (only 1 point above the low for her predecessor, Piñera’s. The disapproval rating rose to 68% from 66%. She is also losing support for her reform projects, including the much debated education system and labour reform.