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Emerging Markets: What has Changed

Summary:
Summary South Korea proposed resuming military and humanitarian exchanges with North Korea. The European Union may sanction Poland over its controversial judicial overhaul. Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan. Turkey’s worsening relations with Germany will come with economic costs. South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%. Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets S&P raised the outlook on Mexico’s BBB+ rating from negative to stable. Stock Markets In the EM equity space as measured by MSCI, South Africa (+1.8%), Chile (+1.6%), and China (+1.5%) have

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Summary

  • South Korea proposed resuming military and humanitarian exchanges with North Korea.
  • The European Union may sanction Poland over its controversial judicial overhaul.
  • Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan.
  • Turkey’s worsening relations with Germany will come with economic costs.
  • South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%.
  • Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets
  • S&P raised the outlook on Mexico’s BBB+ rating from negative to stable.

Stock Markets

In the EM equity space as measured by MSCI, South Africa (+1.8%), Chile (+1.6%), and China (+1.5%) have outperformed this week, while Indonesia (-1.8%), Russia (-1.5%), and Colombia (-1.5%) have underperformed.  To put this in better context, MSCI EM rose 1.2% this week while MSCI DM rose 0.5%.
 
In the EM local currency bond space, Brazil (10-year yield -23 bp), South Africa (-17 bp), and Russia (-10 bp) have outperformed this week, while Chile (10-year yield +10 bp), Colombia (+4 bp), and China (+4 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 10 bp to 2.33%.
 
In the EM FX space, BRL (+1.9% vs. USD), KRW (+1.3% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while ARS (-3.0% vs. USD), PLN (-1.4% vs. EUR), and ILS (-0.4% vs. USD) have underperformed.

Stock Markets Emerging Markets, July 22

Emerging Markets: What has Changed

- Click to enlarge

South Korea

South Korea proposed resuming military and humanitarian exchanges with North Korea. President Moon Jae-in promised a different approach to North-South relations from the hardline approach taken by his predecessor Park Geun-eh. The announcement came after North Korea signaled a willingness to engage.  Moon has already suspended the controversial missile shield, so we may see some further thawing of relations.

Poland

The European Union may sanction Poland over its controversial judicial overhaul. The European Commission confirmed it is close to starting a procedure that could eventually lead to a loss of Poland’s EU voting rights under Article 7 of the EU treaty. The judicial revamp would force all Supreme Court judges to retire and would give the government more say over new picks for the judiciary.

Turkey

Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan. Mehmet Simsek, who has responsibility for economic issues, was the only Deputy Prime Minister to keep his position. As such, we see little in the way of policy implications as Erdogan is still calling the shots.
Turkey’s worsening relations with Germany will come with economic costs. The latest flare-up comes after Turkey arrested a German human rights activist for being part of a terrorist organization. German Foreign Minister Gabriel announced a “re-orientation” of German policy toward Turkey and warned German companies against doing business there and issued revised guidelines for travelers. German business groups warned of a “significant drop” in sales to Turkey.

South Africa

South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%. No change was expected. This is its first rate cut since July 2012. Now that the door has been opened, further cuts are likely at the September 21 and November 23 meetings.

Brazil

Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets. The government expects to raise BRL10.4 bln ($3.3 bln) from the fuel tax, and plans to freeze spending by BRL5.9 bln. Extraordinary measures are needed as the recovery continues to lag expectations.

Mexico

S&P raised the outlook on Mexico’s BBB+ rating from negative to stable. The agency said that it doesn’t expect significant worsening of the country’s debt load. It noted that “We believe that the prompt reaction of Mexican government authorities to recent negative shocks, such as the depreciation of the currency in late 2016, will diminish the recently rapid pace of debt accumulation and help stabilize the government’s debt burden.”

GDP, Consumer Inflation and Current Accounts

Emerging Markets: What has Changed

The Economist poll of forecasters, July 2017 Source: economist.com - Click to enlarge

 

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About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH

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