EM Preview for the Week Ahead

blog-icons-empreview emerging markets previewEM FX ended last week on a firm note, shrugging off political risk that consumed markets earlier in the week.  With US rates remaining low, the dollar remains under pressure against the majors, and so EM FX is likely to benefit also.  Yet we warn investors not to jump back into EM countries that are inherently riskier, such as Brazil, South Africa, and Turkey.  We continue to favor Asia in the current environment.
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Yen and Aussie Bears Push Forward, while Sterling Bears Continue to Run for Cover

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In the Commitment of Traders reporting week ending May 16, speculators in the futures market made three significant adjustments in the currency futures.  

 

First, they continued to accumulate a large short yen position.  The bears added 23k contracts to their gross short yen position to lift it to 102k contracts.  This is the highest in two months and the largest build in five months.  The net short yen position swelled to 60k contracts from 36.3k.

 

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What Has Changed in EM

  • IconChina’s government approved the creation of a bond link between Hong Kong and the mainland
  • S&P upgraded Indonesia one notch to investment grade BBB- with stable
  • Fitch revised the outlook on Vietnam’s BB- rating from stable to positive
  • Egypt will announce a package of social spending soon
  • Moody’s changed the outlook on Poland’s A2 rating from negative to stable
  • Brazil press reported that meat-packing company JBS has submitted compromising tape recordings to the Supreme Court
  • Chile central bank surprised markets with a 25 bp cut but signaled a move to a neutral bias Continue reading

Shale’s Lesson for Creditors and Debtors

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The heavy hand of past borrowings continues to hang over us.  China’s explosion of debt is worrisome.  The bad loans being carried by European banks may be a factor restraining the willingness to lend.   The IMF and the EU are still at odds over the sustainability of Greek debt. Meanwhile, data released yesterday showed that household debt in the US surpassed the pre-crisis peak in Q1 (to ~$12.7 trillion). Arrears sharply lower than before, with the notable exception of student loans.  Also, there has been some recent slippage on credit cards and vehicle loans.

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The Politics and Economics of the US-China Agreement

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Last week the US and China announced some details of a tentative trade agreement.  Many observers are scratching their heads.  Commerce Secretary Ross says the goal is to reduce the roughly $360 bln bilateral deficit.  There is little in the agreement that will achieve this.  

The beef and other agricultural goods that the US can begin selling China are not on favored terms, and US producers will be competing, for example, with Brazil.  Moreover, the amounts are too small to produce much of the trade imbalance.  The US has agreed to be more open to cooked poultry from China, but this too is not on favored terms, and will health concerns may limit US demand.  

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