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Tue, 25th April 2017

Anirudh Sethi Report

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Emerging Markets -An Update

  • The IEA forecast that the surplus in global oil markets will last for longer than previously thought.
  • Philippine President Duterte called for US troops to leave the southern island of Mindanao.
  • Relations between Poland and the EU are deteriorating.
  • Former head of Brazil’s lower house Eduardo Cunha was expelled and banned from public office for eight years.
  • Brazil’s central bank cut the amount of daily reverse swap contracts sold to 5,000.
In the EM equity space as measured by MSCI, Thailand (+2.2%), Qatar (flat), and Indonesia (-0.1%) have outperformed this week, while Colombia (-4.0%), Brazil (-3.4%), and Taiwan (-3.0%) have underperformed.  To put this in better context, MSCI EM fell -2.7% this week while MSCI DM fell -0.9%.

In the EM local currency bond space, South Africa (10-year yield -6 bp), Czech Republic (+1 bp), and China (+1 bp) have outperformed this week, while Hong Kong (10-year yield +20 bp), the Philippines (+18 bp), and Russia (+16 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 1 bp this week to 1.69%.

 
In the EM FX space, ZAR (+0.8% vs. USD), PLN (+0.7% vs. EUR), and CNH (+0.6% vs. USD) have outperformed this week, while MXN (-3.7% vs. USD), KRW (-2.1% vs. USD), and MYR (-1.4% vs. USD) have underperformed.

 
The IEA forecast that the surplus in global oil markets will last for longer than previously thought.  The surplus is seen persisting into late 2017, as demand slumps and supply rises.  It noted that demand in China and India are “wobbling” while record output from OPEC’s Gulf members is adding to the glut.  Previously, the IEA had looked for a balanced global oil market this year.  
Philippine President Duterte called for US troops to leave the southern island of Mindanao.  US troops have been there helping Philippine troops fight rebel groups.  While there was some backtracking later (concern for their safety and/or that their exit was needed for peace talks to succeed), Duterte’s remarks come after the well-documented exchange last month that led US President Obama to cancel a one-on-one meeting with Duterte.  Relations between the two nations bear watching.
Relations between Poland and the EU are deteriorating.  In a non-binding resolution, the EU voted for an end-October deadline for Poland to act on the recommended actions to address the government’s clash with the Constitutional Tribunal.  Polish officials responded with cries of censorship.  The EU began its inquiry into the Polish government’s behavior back in January over efforts to curb the powers of the Constitutional Tribunal.
Former head of Brazil’s lower house Eduardo Cunha was expelled and banned from public office for eight years.  Cunha led the drive to impeach President Rousseff.  He denied wrongdoing but an overwhelming majority of 450 lawmakers voted to expel him on charges that he lied about holding Swiss bank accounts.  Only 10 voted in favor of Cunha and 9 abstained.  It supports our view that political risk remains high despite the impeachment, with many fearing that Cunha will take others (including members of the Temer government) down with him.
Brazil’s central bank cut the amount of daily reverse swap contracts sold to 5,000.  This is down from 10,000 previously and means less upward pressure on USD/BRL (fewer reverse swaps are akin to less buying of USD). 

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