Emerging Markets: What has Changed

1) Chinese policymakers introduced circuit-breakers for its equity markets on Monday, but then suspended them on Thursday 2) PBOC finally fixed USD/CNY lower (albeit marginally) Friday after eight straight days of higher fixings 3) Tensions have risen on the Korea peninsula after the North detonated some sort of nuclear weapon 4) The State Bank of Vietnam has moved to a more market-based exchange rate 5) Brazil’s former President Lula has been ordered to testify as a witness for a case regarding jailed lobbyist Paes dos Santos 6) Venezuelan President Maduro instituted a major cabinet shuffleIn the EM equity space, Qatar (+2.7%), Hungary (+1.3%), and Turkey (+1.1%) have outperformed this week, while Poland (-4.6%), Hong Kong (-4.1%), and the Philippines (-3.8%) have underperformed.  To put this in better context, MSCI EM fell -3.6% this week while MSCI DM fell-3.5%.

In the EM local currency bond space, the Philippines (10-year yield -49 bp), Brazil (-31 bp), and Poland (-23 bp) have outperformed this week, while Colombia (10-year yield +12 bp), Turkey (+12 bp), and Hungary (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -10 bp this week.

In the EM FX space, IDR (+0.1% vs. USD), BRL (flat vs. USD), and CZK (flat vs. EUR) have outperformed this last week, while ARS (-4.9% vs. USD), ZAR (-3.8% vs. USD), and MXN (-3.4% vs. USD) have underperformed.

1) Chinese policymakers introduced circuit-breakers for its equity markets on Monday, but then suspended them on Thursday.  Trading was suspended for 15 minutes when stocks fall 5%, and trading is halted for the day when stocks fall 7%.  Furthermore, the CSRC tried to restore confidence by announcing that major investors would be permitted to sell no more than 1 percent of a company's shares on the open market every three months. The rule, which comes into effect January 9, replaces an existing six-month ban on any secondary market sales that was due to expire Friday.

2) PBOC finally fixed USD/CNY lower (albeit marginally) Friday after eight straight days of higher fixings.  Along with the suspension of the circuit-breakers, this has helped calm global markets somewhat.  Unfortunately, the story is most likely not ending anytime soon.

3) Tensions have risen on the Korea peninsula after the North detonated some sort of nuclear weapon.  Pyongyang claims it was a hydrogen bomb, but many analysts are skeptical that it has the wherewithal to produce this more powerful version.  While the long-term investment implications are likely to be limited (as Pyongyang’s previous nuclear tests have proven), the short-term impact will likely keep markets extra jittery.

4) The State Bank of Vietnam has moved to a more market-based exchange rate.  Rather than a fixed reference rate that is adjusted infrequently, the central bank now sets a daily reference rate that will apparently be allowed to adjust to market conditions.  This is similar to what the PBOC did in August.  It’s still a black box, but at least it allows for greater daily movements.  The central bank had kept the reference rate unchanged since August 19, when it weakened the fixing by 1% and increased the trading band to 3% on either side.

5) In Brazil, some were hoping that the congressional recess would offer a break from negative political headlines.  Unfortunately, that is not the case.  Former President Lula has been ordered to testify as a witness on January 25, regarding jailed lobbyist Paes dos Santos. To complicate matters, Lula’s son is involved in the investigation.  If Lula is hoping to regain the presidency in 2018, this won’t help matters but for investors, this would be a medium-term positive if it keeps the PT out of power in the next election.

6) Venezuelan President Maduro instituted a major cabinet shuffle.  Luis Salas was named the new Economy Minister.  He has blamed high inflation on the “parasitic” business class, suggesting that Maduro is doubling down on unorthodox economic policies despite recently losing control of congress to the opposition.  While we believe the elections are a good sign, we see a prolonged period of political instability as long as Maduro is president.(from my colleague Dr. Win Thin)