Emerging Markets: What Has Changed - Friday, July 7

Written by my colleague Dr. Win Thin

The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.

The Pakistani rupee was devalued, prompting a new central bank governor to be named.

Vietnam’s central bank cut interest rates for the first time since March 2014.

Egypt’s central bank surprised markets with a 200 bp hike to 18.75%.

South Africa’s ruling ANC reportedly proposed that SARB be state-owned.

Petrobras announced two separate cuts to fuel prices.

In the EM equity space as measured by MSCI, Chile (+1.9%), Hungary (+1.8%), and India (+1.7%) have outperformed this week, while Qatar (-1.4%), Hong Kong (-1.3%), and Russia (-1.1%) have underperformed. To put this in better context, MSCI EM fell -0.8% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Argentina (10-year yield -6 bp), India (-3 bp), and Taiwan (-3 bp) have outperformed this week, while Turkey (10-year yield +27 bp), Colombia (+25 bp), and Indonesia (+21 bp) have underperformed. To put this in better context, the 10-year UST yield rose 8 bp to 2.39%.

In the EM FX space, EGP (+1.4% vs. USD), BRL (+0.5% vs. USD), and HUF (up 0.2% vs. EUR) have outperformed this week, while TRY (-2.9% vs. USD), RUB (-2.8% vs. USD), and ZAR (-2.6% vs. USD) have underperformed.

The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile. The US and South Korea almost immediately announced a new joint military exercise. Although the US has indicated that all options are on the table, there does not appear to be support for military options by South Korea, Japan, Russia, or China.

The Pakistani rupee was devalued, prompting a new central bank governor to be named. Yet the move was confusing, as Finance Minister Dar said the rupee’s fall was due to “miscommunication.” It also prompted Dar to choose a new central bank governor to replace Acting Governor Riazuddin. Incoming Governor Bajwa is seen as being loyal to Dar, which could hurt central bank independence.