Emerging Markets: What Has Changed - Friday, April 7

Written by my colleague Dr. Win Thin

Reserve Bank of India surprised markets with the start of the tightening cycle.

The Czech National Bank (CNB) ended the EUR/CZK floor.

Israeli central bank said it won’t hike rates until Q2 2018.

Both S&P and Fitch cut South Africa’s rating one notch to sub-investment grade BB+.

Moody’s put South Africa’s Baa2 rating on review for a downgrade

S&P upgraded Argentina one notch to B with stable outlook.

Brazil’s government will water down its pension reform plan

Brazil’s central bank corrected some errors in its inflation report.

In the EM equity space as measured by MSCI, the Philippines (+3.8%), Chile (+3.5%), and Poland (+3.4%) have outperformed this week, while Korea (-0.7%), Turkey (-0.6%), and Peru (-0.5%) have underperformed. To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.5%.

In the EM local currency bond space, Bulgaria (10-year yield -11 bp), Chile (-6 bp), and South Africa (-6 bp) have outperformed this week, while India (10-year yield +17 bp), Turkey (+12 bp), and Indonesia (+10 bp) have underperformed. To put this in better context, the 10-year UST yield fell 6 bp to 2.33%.

In the EM FX space, CZK (+1.7% vs. EUR), INR (+0.9% vs. USD), and EGP (+0.7% vs. USD) have outperformed this week, while ZAR (-3.0% vs. USD), TRY (-2.7% vs. USD), and RUB (-1.6% vs. USD) have underperformed.

Reserve Bank of India surprised markets with the start of the tightening cycle. It hiked the reverse repo rate 25 bp to 6.0% but left the repo rate steady at 6.25%. The decision was unanimous, and we expect further tightening as the year progresses.

The Czech National Bank (CNB) ended the EUR/CZK floor. The timing was a little earlier than expected, but rising inflation and a robust economy warranted it. While officials warned that rate hikes are now on the table, we see no move near-term. Upcoming central bank policy meetings are May 4 and June 29. We see very little risk of a rate hike at either one, despite Governor Rusnok’s warning today that a May hike can’t be rule out.