Weekly Emerging Markets: What has Changed?

In the EM equity space, China (+5.1%), South Africa (+3.8%), and Turkey (+3.6%) have outperformed this week, while Thailand (-0.7%), Qatar (-0.7%), and Colombia (-0.3%) have underperformed.  To put this in better context, MSCI EM rose 3.3% this week while MSCI DM rose 1.2%.

In the EM local currency bond space, Russia (10-year yield -32 bp), Colombia (-24 bp), and Mexico (-22 bp) have outperformed this week, while South Africa (10-year yield +14 bp), Philippines (+5 bp), and Czech Republic (+5 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -11 bp this week.

In the EM FX space, RUB (+3.1% vs. USD), COP (+2.8% vs. USD), and KRW (+2.6% vs. USD) have outperformed this week, while EGP (-11.8% vs. USD), BRL (-1.0% vs. USD), and PEN (-0.5% vs. USD) have underperformed.China press is reporting that policymakers are drafting rules for a so-called Tobin tax on yuan transactions.  This would seem to go against China’s efforts at making the yuan more accessible and liquid.  While it could deter speculative activity, the tax could also drive away long-term investment flows.  The notion of a Tobin tax has been around for decades, but has never been implemented due to the potential disruptive impact on markets.

Former President Lula was named to the cabinet post of Chief of Staff by his protégé, President Rousseff.  A Federal Judge has already issued an injunction suspending Lula’s appointment, but this injunction has in turn been reportedly overturned by another judge.  The situation remains fluid, but suffice it to say that no matter what happens, Rousseff’s appointment of Lula has ignited another round of popular protests that is likely to keep impeachment pressures going.  In that regard, the Lower House has finally formed an impeachment committee.  Stay tuned.

The Brazilian central bank said it “sees room” to partially unwind the FX swaps program.  After that, the bank only rolled 3600 FX swaps contracts of the 9600 that were maturing.  The recent BRL gains are giving the bank an opportunity to pare the swaps program in favorable market conditions.  During the extended period of BRL weakness, it didn’t make sense to unwind the program since it would’ve been taken as a negative signal and led to further FX losses for the central bank.

Egypt devalued the pound by almost 13% and said it would adopt a “more flexible exchange rate.”  The central bank then hiked rates by a larger than expected 150 bp.  Shaky fundamentals are likely to persist in 2016, and so pent up selling pressure is likely to keep the pound on a weakening trend.  Prior to the move, the pound had been kept around 7.83 since mid-November.  This was not a hard peg, but rather a soft one that has been adjusted from time to time.  The National Bank of Egypt (NBE, the country’s largest commercial bank) said it will offer dollar call options for up to a year to foreign investors of local currency T-bills.

The National Executive Committee of the ruling African National Congress will meet this weekend as political tensions rise.  Two senior ANC officials (including Deputy Finance Minister Jonas) said that the Gupta family (closely tied to President Zuma and his family) offered them ministerial posts in exchange for business concessions.  This comes on top of jitters about potential clashes between Zuma and Finance Minister Gordhan.  While some ANC officials oppose Zuma, we believe the president still has enough support in his party to muddle through.