What Has Changed in EM

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  • The Reserve Bank of India cut its inflation forecast for FY2017/18
  • South Korean President Moon suspended the installation of the remaining components of the THAAD missile shield
  • S&P cut Qatar one notch to AA-
  • Turkey looks likely to get caught up in yet another regional conflict
  • Brazil’s structural reform agenda has been delayed as President Temer remains on the ropes

In the EM equity space as measured by MSCI, Peru (+2.9%), China (+2.5%), and Poland (+1.5%) have outperformed this week, while Qatar (-6.1%), South Africa (-1.7%), and Indonesia (-1.5%) have underperformed.  To put this in better context, MSCI EM rose 0.6% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, India (10-year yield -15 bp), Mexico (-8 bp), and Brazil (-7 bp) have outperformed this week, while Turkey (10-year yield +13 bp), Colombia (+7 bp), and South Africa (+5 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 6 bp to 2.22%.

In the EM FX space, MXN (+2.6% vs. USD), ARS (+0.7% vs. USD), and CLP (+0.6% vs. USD) have outperformed this week, while COP (-0.9% vs. USD), BRL (-0.9% vs. USD), and EGP (-0.7% vs. USD) have underperformed.

The Reserve Bank of India cut its inflation forecast for FY2017/18.  For H1, it sees inflation averaging 2.0-3.5% vs. 4.5% previously.  For H2, it sees inflation averaging 3.5-4.5% vs. 5% previously.  While this may take some pressure off the RBI to tighten, we think talk of possible easing is unwarranted.

South Korean President Moon suspended the installation of the remaining components of the THAAD missile shield.  Officials said that the existing launchers would not be affected, but systems that haven’t been deployed are on hold pending an environmental impact assessment.  Officials said this assessment could take as long as a year.

S&P cut Qatar one notch to AA-.  It was put on negative watch, suggesting further downgrades ahead.  The agency cited the Saudi-led move to isolate Qatar as the main factor, noting that it “will exacerbate Qatar’s external vulnerabilities and could put pressure on its economic growth and fiscal metrics.”  S&P added that it will assess the impact of the Saudi-led move by its next scheduled review on August 25.

Turkey looks likely to get caught up in yet another regional conflict.  President Erdogan has criticized the Saudi-led move to isolate Qatar, and his AKP party has asked to fast-track approval for putting Turkish troops on the ground in Qatar.

Brazil’s structural reform agenda has been delayed as President Temer remains on the ropes.  Press reports suggest he has decided to postpone his reform agenda to focus on his political survival.  Reports suggest he will delay the house vote on pension reform to August.  We are skeptical that the vote will be held at all.