What Has Changed in EM

Blog icons-EMchanged

  • China reported lower than expected September reserve figures
  • Polish central bank Governor Glapinski adjusted the forward guidance
  • Brazil will open up development of its so-called pre-salt oil fields to foreign companies
  • Colombia’s referendum on the FARC peace agreement failed by a razor-thin 50.2% to 49.8% margin

In the EM equity space as measured by MSCI, Brazil (+5.3%), Czech Republic (+4.4%), and Hungary (+3.0%) have outperformed this week, while Peru (-3.3%), UAE (-2.2%), and South Africa (-1.4%) have underperformed. To put this in better context, MSCI EM rose 1.4% this week while MSCI DM fell -0.7%.

In the EM local currency bond space, Brazil (10-year yield -23 bp), India (-8 bp), and Turkey (-4 bp) have outperformed this week, while the Philippines (10-year yield +38 bp), Colombia (+19 bp), and Poland (+11 bp) have underperformed. To put this in better context, the 10-year UST yield rose 14 bp this week to 1.73%.

In the EM FX space, BRL (+1.7% vs. USD), HUF (+1.4% vs. EUR), and RUB (+1.3% vs. USD) have outperformed this week, while TRY (-1.5% vs. USD), KRW (-1.3% vs. USD), and CLP (-1.3% vs. USD) have underperformed.

Although Chinese markets are still closed for the national holiday, lower than expected September reserve figures were reported. They fell to $3.166 trillion from $3.185 trillion. This is a new five-year low. This was also a somewhat larger drawdown than surveys anticipated, which when coupled with the softening yuan suggests that capital outflows from China may be picking up again.

Polish central bank Governor Glapinski said he expects the next move to be a hike, but adjusted the forward guidance. He now sees the likely start of the tightening cycle in early 2018 instead of late 2017. Deflation appears to be easing, while the economy rebounded in August after a weak July.

Brazil will open up development of its so-called pre-salt oil fields to foreign companies. Congress approved legislation that ended the requirement that Petrobras be the sole operator in these deep-water areas by a 292-101 vote. Amendments to the legislation will reportedly be debated next week before President Temer signs it into law. With oil prices rebounding, the timing is good for Brazil to try to lure foreign investors into the sector.

Colombia’s referendum on the FARC peace agreement failed by a razor-thin 50.2% to 49.8% margin. Polls had suggested a fairly easy passage, but the “no” vote was driven by the perception that the deal was too lenient on the rebels. Both sides are signaling a desire to continue the peace process, but we do not think a renegotiated deal will be easy. If the government comes back with a tougher deal on FARC, the rebel leader will be hard-pressed to give in. President Santos was just awarded the Nobel Peace Prize.