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.  

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