Emerging markets: Watching fed, rates and current accounts

By Dimitra DeFotis/ Barrons

The emerging market calendar was full last week. The iShares MSCI Emerging Markets exchange-traded fund (EEM) was moving higher at the open of US trading, while the VanEck Vectors Russia ETF (RSX) was up 0.1% and the iShares China Large-Cap ETF (FXI) was down 0.6%. The South African rand is the strongest emerging market currency this morning, up 1% against the US dollar in recent trading, and lifting the iShares MSCI South Africa ETF (EZA) up 1.3%. the Mexican peso is 0.6% stronger against the dollar this morning, lifting the  iShares MSCI Mexico Capped ETF (EWW) up 0.8%.

On the agenda this week: China reports third quarter GDP, which is expected to come in near 6.7%. Brazil is expected to make a 25 basis point cut in its benchmark Copom rate to 14%, also on Wednesday. In addition, on Wednesday the Philippines’ president makes a state visit to China. Leaders of the European and U.S. central bank will speak in coming week.

Strategist Robert Savage, in his summary of the week that was and the week ahead for his Track.com missive, writes: ”…The week past maybe best described by what wasn’t said rather than what happened. Less was said about policy even as the data pointed to potential for a global recovery. Last Friday brought the FOMC Chair Yellen speech where she made no mention of raising interest rates and said policy “may want to aim at being more accommodative” during recoveries. To be fair, the focus for her speech as on research after the crisis.

“We need to know more about the manner in which inflation expectations are formed and how monetary policy influences them,” Yellen said … The balance of a stronger USD and stronger commodities unsettled many markets with Emerging Markets still on the front line for risk as demand internally seems to matter more than external – with inflation not mixing well with weaker FX or lax rate policy.

The Brazil, Turkey and Indonesia rate decision [last] week will be watch closely to see if current account deficits matter in the new framework. Macro may have died over the summer but it appears to be alive and well in the autumn as British pound (GBP) weakness drives rates, as China data matters again, as the US election heats up along with the Russian meddling in it with a cyber war of words escalating, and as central bankers look to have more complicated decisions from the European Central Bank to the Bank of Canada [this] week. Rates have plenty of room to go up and still remain in a secular downtrend, that won’t help anyone but may hurt a few in particular – with the euro (EUR), Canadian dollar (CAD), much of emerging markets (EM) on watch – even as the US seems ready to get to used to 2% 10-year rates again.

In EM FX, the political risks of South Africa dominated with South Africa rand (ZAR) off 3.3% on the week to 14.258. Poland suffered with geopolitical concerns rising, along with EUR, Polish zloty (PLN) off 2.8% on the week to 3.92 with 4.00 target. The South Korean won (KRW) fell 1.85% – lock step with Chinese yuan (CNY) and Japanese yen (JPY). Russia lost ground despite oil, the Russian ruble (RUB) off 1% to 62.995 with Putin Sabre-rattling, but may gain on Fitch rating upgrade late Friday. The offshore Chinese yuan (CNH) fell 0.85% to 6.7340 after the China holiday return saw a dollar catch up – data mixed trade vs CPI. The Brazilian real (BRL) gained 0.45% to 3.1915 with carry trade driving and politics holding. The big rally up in the Mexican peso (MXN) as U.S. presidential candidate Donald Trump dives in polls stalled with rest of EM FX but MXN still up 1.35% on the week after testing 18.80 support…”

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