Press reports suggest that China’s central bank has ordered banks to limit new loans in Q1.
Fitch revised the outlook on Nigeria’s B+ rating from stable to negative.
Russia announced details of the FX purchase plan.
Brazil’s central bank confirmed it will simplify the reserve requirement system for banks.
S&P cut the outlook on Chile’s AA- rating from stable to negative.
Mexican announced another hike in fuel prices will take place on February 4.
Mexican President Pena Nieto canceled a planned meeting with President Trump as tensions flare
In the EM equity space as measured by MSCI, Mexico (+5.1%), Russia (+4.5%), and Poland (+4.0%) have outperformed this week, while UAE (-1.5%), Hungary (-0.1%), and South Africa (flat) have underperformed. To put this in better context, MSCI EM rose 2.2% this week while MSCI DM rose 1.1%.
In the EM local currency bond space, Colombia (10-year yield -17 bp), the Philippines (-16 bp), and Peru (-10 bp) have outperformed this week, while Poland (10-year yield +18 bp), South Africa (+13 bp), and Korea (+7 bp) have underperformed. To put this in better context, the 10-year UST yield rose 3 bp this week to 2.50%.
In the EM FX space, MXN (+2.7% vs. USD), CLP (+1.1% vs. USD), and ZAR (+0.9% vs. USD) have outperformed this week, while TRY (-2.7% vs. USD), HUF (-0.7% vs. EUR), and COP (-0.4% vs. USD) have underperformed.
Press reports suggest that China’s central bank has ordered banks to limit new loans in Q1. The PBOC reportedly emphasized its concern about mortgage lending. Reports also suggest that it may make some lenders pay more for deposit insurance. If reports are true, then we would expect the economy to slow as we move through 2017. For now, China is not one of the major market drivers but this news would clearly be negative for risk and EM.
The Mexican Peso is plunging once again this morning – very close to all-time record lows – as fears spread that Ford’s decision yesterday may become the norm following president-elect Trump’s tweet that “this is just the beginning.”
Bloomberg notes that Ford’s move, which follows a similar decision by United Technologies Corp.’s Carrier in November, makes it all the more important for Mexican President Enrique Pena Nieto to dissuade other foreign companies from following suit in the face of Trump’s wrath. Mexico’s northern neighbor buys 80 percent of the Latin American nation’s exports, and luring U.S. companies is a cornerstone of the government’s plans to modernize industries from construction to oil.
“A lot’s at stake, considering that since 1999 close to 46 percent of foreign direct-investment flows into Mexico originated in the U.S.,” said Alonso Cervera, chief Latin America economist for Credit Suisse Group AG. “Investors will likely be anxious to see which other companies may do the same.”
The damage caused by companies buckling under political pressure offers a preview of the ripples that could jolt Mexico’s economy should Trump also follow through with threats to tear up free-trade agreements and to build a border wall. Economists in Bloomberg surveys have already cut their median forecasts for GDP growth in 2017 to 1.7 percent from an estimate of 2.3 percent before Trump was elected.
China will raise the sales tax on small cars to 7.5% in 2017.
New methodology used by Turkstat to measure Turkish GDP has led to significant upward revisions.
Turkish authorities are growing more concerned about the weak lira.
Fitch moved the outlook on Chile.
Chile’s central bank shifted to an expansionary policy bias.
Colombia selected Juan Jose Echavarria to be the new central bank governor.
Fitch revised the outlook on Mexico’s BBB+ rating from stable to negative.
Banco de Mexico hiked rates by a larger than expected 50 bp.
In the EM equity space as measured by MSCI, Hungary (+4.3%), Russia (+3.2%), and Turkey (+2.3%) have outperformed this week, while Brazil (-3.8%), China (-3.6%), and Chile (-3.5%) have underperformed. To put this in better context, MSCI EM fell -2.3% this week while MSCI DM fell -0.1%.
In the EM local currency bond space, Poland (10-year yield -15 bp), Korea (-4 bp), and Czech Republic (-4 bp) have outperformed this week, while the Philippines (10-year yield +41 bp), Indonesia (+32 bp), and Hong Kong (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 12 bp this week to 2.59%.
In the EM FX space, RUB (+1.4% vs. USD), HUF (+0.9% vs. EUR), and PLN (+0.7% vs. EUR) have outperformed this week, while CLP (-2.7% vs. USD), EGP (-2.7% vs. USD), and ZAR (-1.7% vs. USD) have underperformed.
China will raise the sales tax on small cars to 7.5% in 2017. The tax will be increased further to 10%, according to the Finance Ministry. The government cut this tax rate from 15% in October 2015 after lobbying from China’s auto association. Automakers had asked for the tax cut to be made permanent.
Stocks tumbled Tuesday, with the S&P 500 posting its sixth straight loss as nervous investors continued to monitor the run-up to the 2016 election and wait for news from the Federal Reserve, which concludes a two-day policy meeting on Wednesday.
The Dow Jones industrial average ended down 105 points, or 0.6%. The Standard & Poor’s 500 index fell 0.7% and the Nasdaq composite dropped 0.7%.
Increasingly, investors’ focus has been the presidential election, as polls between Hillary Clinton and Donald Trump appear to have tightened following last week’s news that the FBI had opened a new investigation into Clinton’s private email server. The narrowing in the race has introduced a new element of uncertainty into the market, something that analysts say is likely to keep trading in check.
There were signs of nervousness in the market. Gold prices rose more 1% and the Mexican peso, which has become a proxy for Trump’s chances to win, has been falling steadily against the U.S. dollar since Friday. The peso is down 1.2% against the dollar, a significant move in currency trading.
Investors are also keeping an eye on the Federal Reserve as policymakers started its two-day meeting on Tuesday, where it is widely expected the nation’s central bank will keep interest rates stable.
U.S. manufacturing grew last month at the fastest pace since July, a sign that American factories are coping with economic weakness overseas and a strong dollar. The Institute for Supply Management says its manufacturing index came in at 51.9 up from 51.5 in August. Anything above 50 signals growth. Production and export orders grew faster in October.
Speculators turned more bearish the euro and less bullish the Japanese yen in the Commitment of Traders week ending October 11. The dramatic shift in US presidential polls and the continued rally in oil appeared to have spurred speculators to reduce short Mexican peso positions and add to longs.
Speculators in the futures market added 20.1k contracts to their gross short euro position, lifting it to 207.8k contracts. There were still a few speculators that tried picking a bottom before the euro slipped below $1.10 in the spot market. The bulls added 8.6k contracts, lifting the gross long position to 114.3k contracts.
The largest speculative gross long and gross short position in the euro. The net short position rose to 93.5k contracts from 82.1k. This is a two month high. However, sterling’s net short position is larger at 95.5k contracts. This slightly smaller than the previous reporting period (-97.6k contracts). This reflected the fact that speculators covered more gross short positions than liquidated gross long positions. Specifically, the 6.4k long contracts were cut while 8.5k short contracts were covered (leaving the gross long position at 50.4k contracts and the gross short position of 145.9k contracts).
Yen bulls move may be having second thoughts in the face of the continued (three consecutive weeks) dollar recovery in the spot market. They liquidated 22.7k contracts to leave a gross long position of 79.3k contracts. The bears were not enticed and added nearly a hundred contracts to the gross short position, which now stands 33.4k contracts. The net long position of 45.9k contracts (down nearly 23k contracts in the latest reporting week) is the smallest in two months.
U.S. stocks rallied Tuesday following the first presidential debate, as investors digest the first face-off between Hillary Clinton and Donald Trump.
In the first trading session following the first of three face-to-face battles between the Democratic and Republican nominees for president, stocks broke a two-day losing streak, suggesting that markets are giving the first-debate decision to Clinton, although far from a knockout.
In general, Wall Street views Clinton as a more favorable candidate, as she and her policies are viewed as more of a known quantity than Trump, who investors view as a candidate that would inject more uncertainty into financial markets given his views on trade, immigration and other issues.
The Dow Jones industrial average rose 133 points, or 0.7%, to close at 18,228. The broader Standard & Poor’s 500 stock index gained 0.6% to 2160 and the Nasdaq composite index rose 0.9% to 5306.
Stocks were also reacting to good news on consumer confidence. The Conference Board reported that its index of consumer confidence this month jumped to a nine-year high of 104.1, which was better than August’s 101.8 reading and consensus for September of 99. In housing news, the S&P CoreLogic Case-Shiller 20-city price index was flat in July, in line with estimates, and “consistent with the moderate recovery in the housing market.
There are a few notable exceptions. First, over the past several weeks, speculators have reduced gross short euro positions by more than 20% since the end of July. It stands at 173.3k contracts, after the bears covered 16.7k contracts in the CFTC reporting period ending September 13.
If the bears were pulling back in the euro, they were showing their claws on the Mexican peso. The gross short position rose by 10.4k contracts, after increasing by 22k contracts the previous reporting period. At 85.7k contracts, the gross short position is the largest since April. The net short peso position has more than doubled to 65.7k contracts in the past two weeks.
Although the position adjustments in sterling has been modest, the market has turned and has stopped extending gross and net short positions. Both have fallen for two consecutive reporting period from record levels. The gross short speculative position fell by 5.5k contracts to 123.2k contracts, roughly the same amount that was covered in the previous week. The bottom pickers have slowly entered the market. The gross long position bottomed in mid-July near 28k contracts. It edged up 1.6k contracts in the latest reporting period to 40.1k contracts. The net short sterling position of 82.8k contracts surpassed the euro (net short 81.5k contracts) to have the dubious honor of the largest such speculative position.
The summer lull for speculators in the currency futures market continued in the CFTC reporting week ending August 23. Of the 16 gross currency futures positions we track, speculator adjustments were less than 3k contracts in all but three.
The bears added to their gross short sterling position for the eighth consecutive week. The seven hundred contract increase was the smallest of the streak and lifts the gross short speculative position to 130.8k contracts, a new record.
More substantive adjustments were seen in the euro and Mexican peso, where the speculative bears ran for cover. The gross short euro position was trimmed to 182k contracts, as 13.6k contracts were covered. It is the fourth week in a row that shorts were covered. They peaked at 221.8k before the short-covering streak. The speculators covered 14.9k gross short peso contracts, leaving them with 55.4k. It is the third week of short-covering that began with a gross short position of 76k contracts.
Despite the small changes in the gross positions by speculators, two pattern were clear. First, speculators did not reduce the gross long positions in any of the currency futures we track. Second, speculators mostly reduced gross short positions. The exceptions were sterling, as we have seen, and the Australian and New Zealand dollars. We suspect some of the late positioning was caught wrong footed and may help explain the dramatic reaction of Yellen (and Fischer) before the weekend.
Mexico’s central bank has hiked its key lending rate for a second time this year in a bid to support the peso, which has been hard hit by the market turmoil set off by the UK’s shock vote last week to leave the EU.
The muscular move by Banxico to raise rates by 50 basis points to 4.25 per cent comes just days after the peso closed at its weakest level ever against the US dollar
The move is much bigger than the market was expecting with only 5 out of the 26 economists surveyed by Bloomberg predicting a 50bp rise.
In a statement, the central bank said that a “large deterioration” in external conditions – the Brexit vote – could have an adverse effect on inflation.
It said in a statement:
Although the available information still suggests a base scenario for the short and medium term for inflation congruent with the permanent goal of 3 per cent, external conditions have suffered a large deterioration, a situation which could adversely affect the future behaviour of inflation.
With this action, we are seeking to avoid the depreciation of the national currency that we have seen in the past months, and the adjustment of some relative prices, translating into a de-anchoring of inflation expectations in our country,” it added. The bank will remain vigilant, watching the exchange rate and possible pass-through to consumer prices closely, as well as the relative monetary position between the US and Mexico and Mexico’s current account deficit, and said it stood by to take any action, “with all flexibility and whenever conditions dictate.