What Has Changed in EM

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  • China granted US asset managers a CNY250 bln ($38 bln) quota under the existing QFII system
  • Bank of Korea surprised the market by delivering a 25 bp rate cut to 1.25%
  • Oman issued its first global bond since 1997
  • Polish President Duda softened his CHF loan conversion plan
  • Central Bank of Russia resumed its easing cycle with a 50 bp cut to 10.5%
  • There appears to have been a significant change in FX strategy from the Brazilian central bank
  • Brazil’s Prosecutor General has called for the arrest of Senate Chief Calheiros and other PMDB leaders

In the EM equity space as measured by MSCI, UAE (+4.2%), Colombia (+3.5%), and Qatar (+3.3%) have outperformed this week, while Czech Republic (-5.6%), Hungary (-2.3%), and South Africa (-1.9%) have underperformed. To put this in better context, MSCI EM rose 1.1% this week while MSCI DM fell -0.6%.

In the EM local currency bond space, the Philippines (10-year yield -47 bp), Russia (-33 bp), and Indonesia (-21 bp) have outperformed this week, while Ukraine (10-year yield +14 bp), Turkey (+11 bp), and Brazil (+8 bp) have underperformed. To put this in better context, the 10-year UST yield fell -7 bp this week to 1.64%.

In the EM FX space, BRL (+3.0% vs. USD), IDR (+2.3% vs. USD), and MYR (+1.8 vs. USD) have outperformed this week, while CNH (-0.8% vs. USD), TRY (-0.5% vs. USD), and ZAR (-0.2% vs. USD) have underperformed.

China granted US asset managers a CNY250 bln ($38 bln) quota under the existing QFII system. The latest move is largely symbolic, as US asset managers already have access Chinese investments through their Hong Kong and other overseas operations. China also said that a US bank has been picked to be a yuan clearing bank, but no timing was given. This news comes ahead of the MSCI decision June 14 over inclusion of China’s A-shares in its indexes.

Bank of Korea surprised the market by delivering a 25 bp rate cut to 1.25%. It is the first cut since last June. With growth slowing, we had looked for easing in H2, especially after one MPC called for a rate cut in the “near term.” Clearly, more on the MPC moved into this camp this past month. We do not think that the BOK move is “one and done” and we look for more rate cuts ahead.

Oman issued its first global bond since 1997. It sold $1 bln of 5-year paper and $1.5 bln of 10-year paper. The Gulf nation joined neighboring Qatar and Abu Dhabi in issuing external debt recently to make up for the shortfall in oil revenues. Note that Saudi Arabia is considering a bond issue of at least $10 bln and as much as $15 bln, which would eclipse Qatar’s record $9 bln.

Polish President Duda softened his CHF loan conversion plan. While the worst aspects of the original proposal appear to have been dropped, details remain sketchy. Loans would be converted using 1 of 4 potential “fair” exchange rates. Costs to the banks would be capped at around PLN1 bln per annum over a period of 30 years. The proposals remain preliminary, and draft legislation is likely to be sent to parliament by month-end.

Central Bank of Russia resumed its easing cycle with a 50 bp cut to 10.5%. Market was split between no move and a 50 bp cut. Governor Nabiullina said that the real interest rate should be 2.5-3.0%. She added that she is not ready to call this the start of easing cycle. This is the first move since last July, and she said further easing will depend on how inflation and the economy behave.

There appears to have been a significant change in FX strategy from the Brazilian central bank. USD/BRL gapped lower Wednesday to make new lows for the year near 3.35, and tested that area again Friday before turning higher. Yet BCB still has not announced any reverse FX swaps. Back in April and May, the BCB sold reverse swaps aggressively around 3.45 to temper BRL gains.

Brazil’s Prosecutor General has called for the arrest of Senate Chief Calheiros and other PMDB leaders over alleged corruption cover-ups. In a request filed with the Supreme Court, Prosecutor Rodrigo Janot claimed that Calheiros, former President Jose Sarney, and Senator Romero Juca all sought to obstruct the ongoing Carwash corruption probe. Janot is seeking arrest warrants for these politicians as well as suspended lower house Chief Eduardo Cunha, also from Temer’s PMDB party.