20161104-法国巴黎银行-EM_Strategy_Plus_21页_2mb

EM Strategy Plus Summary - 04 November 2016

Core Content

This document provides a detailed analysis of Emerging Market (EM) strategies and market outlook for the week of 04 November 2016. It highlights the potential impact of the US presidential election on global markets and EM assets, as well as specific trade recommendations for various EM currencies and credit instruments.

Main Themes

• US Presidential Election Impact: The US election on Tuesday is expected to cause market volatility, which could influence the Federal Reserve's decision on a December rate hike. EM assets, which are more vulnerable due to weakened US liquidity conditions, are likely to be affected by the election result.

• CEEMEA Currencies: The TRY (Turkish Lira) and ZAR (South African Rand) are the most exposed currencies in CEEMEA, while CEE (Central and Eastern Europe) has a surplus in its net external position.

• Turkey's Currency Situation: Despite the central bank's pause in rate cuts, the TRY continues to depreciate. The strategy involves rolling forward USDTRY call spreads to capture potential depreciation.

• Credit Instruments: There is a recommendation to buy Turkey 5y CDS and sell South Africa 5y CDS, targeting a 40bp spread differential.

• EM Inflows: Portfolio flows into EM remain positive, albeit at a lower pace. The IIF data show that inflows were flat in October, with equities showing positive flows and debt flows remaining negative.

Key Information

What's Up Next Week?

• US Election: Expected to cause market volatility, potentially affecting the Fed's December rate decision.
• EM Vulnerability: EM assets are more vulnerable due to weakened US liquidity conditions.
• Key Data Releases:
  • Asia: Indonesia, Malaysia, and Hong Kong GDP data; central bank meetings in Thailand, Philippines, and South Korea.
  • CEEMEA: Czech Republic and Hungary CPI, retail sales, and industrial production data; Poland's monetary policy meeting.
  • Latam: Brazil's inflation data and Mexico's CPI data.

Trade Recommendations

Key Market Insights

• Crude Oil and EM FX: The fall in crude oil prices has brought it back into line with EM FX, indicating a shift in market dynamics.
• Risky Assets and USD Liquidity: A deeper correction of risky asset prices might be needed to reduce the expectation of a December US rate hike.
• Turkey's FX Deposits: Local FX deposits have fallen significantly, limiting the TRY's upside and increasing its vulnerability.
• CDS Differential: The Turkey-South Africa CDS spread has decoupled from FX, but the current spread does not accurately reflect their rating differences.
• EM Flows: Inflows into EM remain positive, though at a slower pace. Asia has been the main recipient of inflows, while Latam has seen significant bond outflows.

Conclusion

The document emphasizes the importance of monitoring the US presidential election and its potential impact on EM assets. It provides specific trade strategies for various EM currencies and credit instruments, based on current market conditions and economic forecasts. The overall outlook suggests that EM inflows will continue but at a reduced pace, with Turkey and South Africa being key focus areas.