Emerging Markets: What Changed - Friday, August 31

(from my colleague Dr. Win Thin)

China stepped up efforts to attract more foreign inflows to the onshore bond market.

Russia has softened its unpopular pension reform proposal.

The African National Congress withdrew an existing land expropriation bill.

Moody’s downgraded twenty Turkish financial institutions.

Turkey central bank Deputy Governor Erkan Kilimci has reportedly resigned.

Moody’s moved the outlook on Egypt’s B3 rating from stable to positive.

Argentina President Macri asked the IMF to accelerate disbursement of its $50 bln credit line.

Argentine central bank hiked rates 15 percentage points to 60% and pledged not to cut until December.

Brazil central bank offered the first new auction of FX swaps since June 22.

US President Trump announced that the US and Mexico had reached a preliminary trade agreement.

In the EM equity space, as measured by MSCI, Egypt (+6.9%), Qatar (+6.7%), and Hungary (+3.1%) have outperformed this week, while Colombia (-3.2%), Chile (-2.7%), and South Africa (-2.1%) have underperformed. To put this in better context, MSCI EM rose 0.5% this week while MSCI DM rose 0.7%.

In the EM local currency bond space, the Philippines (10-year yield -36 bp), Chile (-17 bp), and Turkey (-17 bp) have outperformed this week, while Argentina (10-year yield +217 bp), Brazil (+28 bp), and Indonesia (+26 bp) have underperformed. To put this in better context, the 10-year UST yield rose 2 bp to 2.84%.

In the EM FX space, ILS (+0.6% vs. USD), KRW (+0.5% vs. USD), and EGP (+0.2% vs. USD) have outperformed this week, while ARS (-18.2% vs. USD), TRY (-9.6% vs. USD), and COP (-3.2% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.2% this week.

China stepped up efforts to attract more foreign inflows to the onshore bond market. The State Council decided to exempt overseas institutions from paying income and value-added taxes on interest income for three years. Elsewhere, the China Foreign Exchange Trade System began allowing block trades for investments through the bond connect program. Coming a week after the PBOC re-introduced its counter-cyclical factor in the CNY fix, it’s clear that policymakers are not aiming for a weak yuan.