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.
Emboldened by his “victory” with Carrier Corp, which agreed to keep 1,100 workers in the US instead of outsourcing them to Mexico in exchange for $7 million in tax incentives over 10 years, as part of his victory tour in Indiana, Donald Trump on Thursday warned that U.S. companies will face “consequences” for outsourcing jobs overseas.
“Companies are not going to leave the United States any more without consequences. Not going to happen,” the President-elect said on a visit to a Carrier Corp plant in Indianapolis cited by Reuters.
U.S. President-Elect Donald Trump speaks at event at Carrier HVAC plant in Indianapolis, Indiana.
EM ended the week on a soft note, as markets were taken off guard by news that the FBI was reopening its investigation of Hillary Clinton’s emails. Risk off trading hit MXN particularly hard. FOMC meeting this week should be a non-event, but markets are likely to remain volatile ahead of the November 8 elections in the US.
Individual country risk remains important. Brazil budget data is likely to provide a reminder of how bad fundamentals remain. China PMI readings will provide the first snapshot of the mainland economy in Q4, though markets remain fairly comfortable with yuan weakness. Turkey is expected to report a higher inflation print, which comes even as the lira trades at record lows. Lastly, Mexico is expected to report a weak Q3 GDP reading, and sentiment is likely to remain vulnerable.
Korea reports September IP Monday, which is expected at -1.1% y/y vs. +2.3% in August. Korea reports October CPI Tuesday, which is expected to rise 1.0% y/y vs. 1.2% in September. Korea also reports October trade and September current account data Tuesday. Exports are seen at -3.0% y/y and imports at -4.5% y/y.
Thailand reports September manufacturing production, trade, and current account Monday. It reports October CPI Tuesday, which is expected to remain steady at 0.4% y/y. Low base effects from last year should see rising inflation in the next couple of months. However, it should remain in the low end of the 1-4% target range next year. Next central bank meeting is November 9, no change in policy seen.
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.
Stocks ended the day higher amid reports that OPEC, the Middle East oil cartel, has agreed to cut production amid an ongoing global glut of crude.
The Dow Jones industrial average, which had been in the red earlier in the afternoon, ended up 110 points, or 0.6%. The broader Standard & Poor’s 500 stock index climbed 0.5% and the Nasdaq composite gained 0.2%.
A big rally in crude sparked the broader market rally. U.S.-produced crude was up $2.17 per barrel, or nearly 5%, to $46.87.
Oil prices jumped Wednesday after reports that the Organization of the Petroleum Exporting Countries (OPEC) had agreed to slash production at a conference in Algiers. If it sticks — and that’s a big if — an accord could help ease the global glut of oil that has washed over the world in the last two years. OPEC member countries agreed to slash production by about 740,000 barrels per day to 32.5 million, Reuters reported Wednesday, citing anonymous sources.
The OPEC news pushed oil stocks sharply higher. The broad Vanguard Energy ETF (VDE) was up 4.3%. Exxon-Mobil (XOM) was 3.8% higher and oil services firm Halliburton was up 3.9%.
Wall Street was also digesting fresh economic news. U.S. durable goods orders in August came in flat, but better than the 1.5% drop economists’ forecast. Still, the report of weak orders for long-lasting, expensive items such as refrigerators was viewed as a sign of economic weakness.
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.
Mexico’s state oil company Pemex posted a $4.4bn loss in the second quarter as crude production continued to slip and global oil prices stayed low. It’s the 15th straight quarterly net loss for Mexico’s largest company.
Pemex’s revenues fell 17.2% from the second quarter of 2015 on a combination of lower gasoline prices in Mexico and lower exports revenues. Crude production fell 2.2% on the year to 2.18m barrels per day
However, Pemex’s overheads are moving in the right direction and its cost-cutting strategies are finally bearing fruit: operational expenditures fell 54.4% year-on-year. Pemex’s mammoth tax burden also fell year-on-year by 37.5%, thanks in part to an adjustment by the federal government which allows Pemex to pay lower taxes when oil prices are lower.
Pemex’s debt increased in the quarter by 21.8% after new issuances and sustained peso weakness compared to the dollar. Total debt is now $96.2bn.
Group of 20 trade ministers meeting here characterized excess capacity in steel and other industries as a global issue requiring collective responses, while citing subsidies and other government support as a contributing factor.
Industrial overcapacity hurts commerce and workers, noted the statement released at the close of a two-day meeting Sunday. To address this problem, nations must communicate and cooperate more to take effective steps to enhance market functions and promote adjustment, the statement said. This is seen as a tacit appeal for the reorganization of China’s so-called zombie companies — those unable to survive without government support.
Japan, the U.S. and Europe had sought to include remedies for tackling the overcapacity problem in the statement. Beijing opposed such a move, calling the issue a structural one that went beyond the scope of a meeting of trade ministers. China has been exporting steel it cannot absorb domestically at low prices, impacting the earnings of steelmakers abroad.
The statement also urged steelmaking nations of the G-20 to participate in a September steel committee meeting of the Organization for Economic Cooperation and Development. The countries are to talk about establishing a global forum to discuss the overcapacity issue.