Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “national bank” Tag

Emerging Markets: An Update

National Bank of Hungary meets Tuesday and is expected to keep policy steady.  The bank has been loosening policy quarterly via unconventional measures, which it just did at its June meeting.  Further easing is possible at the September meeting.  CPI rose only 1.9% y/y in June, the lowest since December and below the 2-4% target range.
Malaysia reports June CPI Wednesday, which is expected to rise 3.8% y/y vs. 3.9% in May.  Although the central bank does not have an explicit inflation target, falling price pressures should allow it to keep rates steady into 2018.
South Africa reports June CPI Wednesday, which is expected to rise 5.2% y/y vs. 5.4% in May.  If so, this would be the lowest rate since November 2015 and would remain in the 3-6% target range.  SARB then meets Thursday and is expected to keep rates steady at 7.0%.  However, we think the weak economy will lead the bank to start an easing cycle in H2 2017.  That leaves September 21 and November 23.
Poland reports June industrial and construction output, real retail sales, and PPI Wednesday.  Consensus for y/y readings are 3.9%, 9.8%, 6.0%, and 2.1%, respectively.  The economy remains robust, but price pressures are falling and so there is no urgency to hike rates.  CPI rose only 1.5% y/y in June, the lowest since December and at the bottom of the 1.5-3.5% target range.
Taiwan reports June export orders Thursday.  Exports and export orders have slowed a bit in recent months and so bears watching.  The mainland economy appears to be holding up well, which should be reflected in Taiwan data.

Emerging Markets :An Update

EM FX ended the week on a mixed note, as investors await fresh drivers.  US jobs data on Friday could provide more clarity on Fed policy and the US economy.  Within EM, many countries are expected to report lower inflation readings for June that support the view that most EM central banks will remain in dovish mode for now.   We remain cautious on the EM asset class near-term.   

 Caixin reports June China manufacturing PMI Monday, which is expected at 49.8 vs. 49.6 in May.  Official manufacturing PMI was already reported at 51.7 vs. 51.2 in May.  While the two series often diverge, we warn of upside risk to the Caixin reading.  For now, markets are comfortable with China’s macro outlook.

Thailand reports June CPI Monday, which is expected to remain flat y/y.  This remains well below the 1-4% target range.  Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%.  Indeed, with no price pressures to speak of, we believe rates will remain steady into 2018.

Indonesia reports June CPI Monday, which is expected to remain steady at 4.3% y/y.  This remains well within the 3-5% target range.  Bank Indonesia next meets July 20 and is expected to keep rates steady at 4.75%.  While the bank has signaled an end to the easing cycle, we do not see any tightening in 2017.

Emerging Market :An Update

EM FX was mixed last week.  The rebound in oil helped some, such as COP, RUB, and MXN.  On the other hand, idiosyncratic political risks weighed on South Africa.   This week could pose a challenge to EM, with lots of Fed speakers, FOMC minutes, and US jobs data.

Thailand reports March CPI Monday, which is expected to rise 1.30% y/y vs. 1.44% in February.  If so, this would be moving closer to the bottom of the 1-4% target range.  BOT just left rates steady at 1.5% last week.  We expect inflation to pick up again, and so BOT should tilt more hawkish as the year progresses.  Next policy meeting is May 24, and we expect steady rates again.  

Indonesia reports March CPI Monday, which is expected to rise 3.80% y/y vs. 3.83% in February.   The target range is 3-5%, but Bank Indonesia has signaled that the easing cycle is over, and should lean more hawkish this year if inflation continues to rise.  Next policy meeting is April 20, we expect rates to be kept steady at 4.75%.
Turkey reports March CPI Monday, which is expected to rise 10.70% y/y vs. 10.13% in February.  Inflation is moving further above the 3-7% target range, and the central bank hiked the Late Liquidity Window lending rate 75 bp to 11.75% at its last policy meeting.  If price pressures continue to rise, the central bank may have to tighten again at its next policy meeting April 26.
Korea reports March CPI Tuesday, which is expected to rise 2.1% y/y vs. 1.9% in February.  The inflation target is 2%, and so BOK should tilt more hawkish if inflation continues to rise.  Next BOK meeting is April 13, and we expect rates to be kept steady at 1.25%.  Korea reports February current account data Wednesday.
Hungary reports February retail sales Tuesday, which are expected to rise 3.5% y/y vs. 3.8% in January.  It reports February IP Wednesday, which is expected to rise 3.0% y/y vs. 1.6% in January.  February trade will be reported Friday.  The economy remains robust, and yet the central bank just eased policy more than expected last week.  The cap on 3-month deposits was cut to HUF500 bln for end-Q2 from HUF750 bln for end-Q1.  

Emerging Markets :An Update

EM should trade firmer this week on news over the weekend that the FBI said its conclusion on Clinton’s emails remained unchanged.  That should lift the cloud of suspicion that grew when the FBI said new emails had been uncovered.   With risk appetite likely to rebound a bit, the Mexican peso should benefit the most as the week gets under way.  

The central banks of Korea, the Philippines, Thailand, Poland, and Peru all meet, and none are expected to change policy.  Still, individual country risk matters.  The Turkish lira hit a record low last week on intensifying political risks, and weakness should continue.  More China data for October should confirm that the economy is stabilizing in Q4.  

Taiwan reports October trade Monday Exports are expected to rise 2.6% y/y, while imports are expected to rise 5.7% y/y.  Taiwan reports October CPI Tuesday, which is expected to rise 0.5% y/y vs. 0.3% in September.  The central bank does not have an explicit inflation target.  However, low inflation will allow the central bank to ease again if needed.
Czech Republic reports September retail sales Monday, which are expected to rise 6.0% y/y vs. 11.1% in August.  It then reports September industrial and construction output as well as trade Tuesday.  October CPI will be reported Wednesday, which is expected to rise 0.7% y/y vs. 0.5% in September.  While this remains below the 1-3% target range, inflation has been creeping higher and has led the central bank to become more confident that the CZK floor will end around mid-2017.

2 big Mumbai-based state-run banks could be merged: Vinod Rai

India may merge two large state banks in the coming financial year once a cleanup of bad assets has run its course, the official overseeing a turnaround of the sector told Reuters, days before a new process to resolve stressed assets goes live.

Consolidation of India’s public-sector banks would represent a final step in rebuilding a financial system capable of underwriting credit growth and job-creating investment in Asia’s third-largest economy.

First, though, the state banks must cleanse their balance sheets.

 They accounted for 88 per cent of a pile of stressed loans that exceeded $138 billion in June, the legacy of a lending binge under the last government that has hobbled Prime Minister Narendra Modi’s growth agenda.

Vinod Rai, the veteran bureaucrat hired this year to head a new Banks Board Bureau, said a next step could be the merger of “two large Mumbai-based banks” that he declined to identify.

“Once that consolidation has taken place, in the second phase, we will put a weaker, smaller bank into this merged entity,” he said in an interview.

Emerging Markets :An Update

Despite the weaker than expected US jobs report, the dollar remains firm and EM is ending the week on a soft note.  The main culprit was higher US rates, with the 2-year yield moving up to 0.85% and is the highest since early June.  Concerns about Brexit impact and as well the health of European banks remain ongoing and could weigh on risk sentiment this coming week.  Lastly, oil may come under more pressure after Russia said it sees no deal with OPEC at next week’s World Energy Congress meeting in Turkey.

China returns from a week-long holiday, and markets may be a bit nervous after it reported lower than expected foreign reserves for September.  Taken in conjunction with the softer yuan, capital outflows from China may be picking up.  Elsewhere, the central banks of Korea, Peru, and Singapore hold policy meetings, though no changes are expected.

China reports September money and new loan data sometime during the week, but no date has been set.  It reports September trade Thursday.  Exports are expected at -3.3% y/y and imports at +0.7% y/y.  It then reports September CPI and PPI Friday, with the former seen rising 1.6% y/y and the latter falling -0.3% y/y.  The PBOC has been on hold since October 2015, when it cut its policy rates by 25 bp.  If the slowdown remains modest, we do not think PBOC will ease further for fear of encouraging debt-fueled growth.  We think the easing cycle is over.

Deutsche Bank Explains Why Central Banks Are Stuck

We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies.  Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday “P2P Meltdown Continues: LoanDepot’s CDO Collapses Just 10 Months After Issuance”), is just one of the many unintended consequences. 

But, as Deutsche Bank’s European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can’t.  Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth.  This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative.  Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they’re not driving incremental economic growth but clearly creating detrimental asset bubbles?

Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.


SBI to price first offshore “coco” bond

State Bank of India is expected to price the country’s first offshore “coco”, or contingent convertible, bond today in a test of international appetite for the country’s banks as they work through a mountain of bad loans.

The deal will also be a test of the growing divide between the cost of capital for Asian and European banks, with Asian banks recently borrowing at record low costs via the bonds, which are known as Additional Tier 1 capital in Basel regulatory terms

SBI’s bonds allow for their value to be temporarily written down if the bank’s capital breaches pre-agreed levels. They can also be written off permanently if India’s central bank deems that the bank would become unviable without either an injection of public funds or the cash from the bonds.

Asia’s AT1 market is in its infancy compared with Europe, where tougher regulatory standards are seen as increasing the risk of the bonds and thus their costs. In August, Standard Chartered sold $2bn of the bonds with a coupon of 7.5 per cent.

Banks leading SBI’s deal are offering its $1bn in dollar-denominated paper with a coupon of about 5.5 per cent.

While far above the record low 3.6 per cent achieved by Singapore’s DBS last month, a deal pricing at those levels would potentially open a funding route for SBI’s competitors and provide a benchmark to price against.

India’s banks – particularly the state-controlled lenders that account for three quarters of banking assets – have been hit hard by a wave of distress in loans to corporate sectors such as infrastructure, power and steel. SBI alone made Rs214bn ($3.2bn) of provisions for troubled assets in the first six months of this year.

India’s government is pursuing a plan to inject Rs700bn into the state-controlled banks over the three years to April 2019, when they will be required to comply with Basel III capital standards.

India’s 10-year bond yield nears 2009 lows

The bond market rally which began the Monday after Raghuram Rajan announced his decision to step down as Reserve Bank of India (RBI) governor has taken on a life of its own.

On Thursday, the 10-year benchmark bond yield fell 6 basis points to 7.19%, coming within striking distance of levels seen back in 2009. Yields are already at their lowest in more than three years and a drop of a few more basis points could take us back to the days of September 2009 when the 10-year yield was at 7.15%.

Such is the optimism in the market that even a fall to levels below 7% is not being ruled out. The last time India had a sub-7% benchmark yield was in July 2009. That was a time when the repo rate was 4.75%—175 basis points below the 6.5% policy rate today.

“…we continue to expect a further rally in rates with 10-year G-sec yield likely to drift lower towards 7% before the end of FY17 on the back of another 25 basis point repo rate cut by the RBI in Q3 FY17 and around Rs.1 trillion in incremental OMO (open market operation) purchases,” said Yes Bank in a research note on Thursday.

The factors that are driving the rally are a combination of global and local. Glocal, as many analysts call it.

Emerging Markets :An Update

The Brexit vote is a game-changer for EM.  While the direct impact on EM is limited, the damage to market sentiment is undeniable.  And to make matters worse, there will be a protracted period of uncertainty as the UK and the EU negotiate the divorce proceedings.  
We do not think individual country stories will matter much in this new investment climate, where risk assets are likely to remain under broad-based selling pressures.  We believe that Asia will outperform, while Latam and EMEA are likely to underperform.
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%.  Deflation persists, with CPI at -0.8% y/y, well below the 1-3% target range.  Yet the central bank is hesitant to enact unconventional policies due to growing concerns about a housing bubble.  For now, the weaker shekel will be very welcome by policymakers in terms of stimulating the economy.
Mexico reports May trade data Monday, where a -$2.16 bln deficit is expected.  Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 4.0%.  However, the market is split.  Of the 15 analysts polled by Bloomberg, 7 see no change, 5 see a 25 bp hike, and 3 see a 50 bp hike to 4.25%.  We see a close call, 50/50 odds between no hike and a 25 bp hike.  The weak peso is obviously a concern, but the inflation pass-through has been minimal.    
Brazil’s central bank releases its quarterly inflation report Tuesday.  This will be the first one prepared under Goldfajn, and will be very important in setting the tone for H2.  We think rising price pressures and a weaker BRL could prevent a cut at the next COPOM meeting July 20.  Brazil then reports June IGP-M wholesale inflation Wednesday, which is expected to accelerate to 12% y/y from 11.1% in May.  Brazil also reports consolidated budget data for May Wednesday, with a primary deficit of –BRL17.1 bln expected.  Brazil reports May IP Friday, which is expected at -8.1% y/y vs. -7.2% in April.  Brazil also reports June trade Friday.