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EM STRATEGY DAILY SUMMARY - 06 June 2018

Core Content Overview

This document provides an update on emerging markets (EM) strategy and market outlook, focusing on key economic developments and policy decisions in various regions. It is produced by BNP Paribas Global Markets Research teams and outlines expectations for central banks, currency forecasts, and market sentiment in the context of broader macroeconomic trends and geopolitical risks.

Key Market and Policy Updates

Central Bank Actions and Policy Outlook

• Poland (NBP):

  • Expected to remain on hold at the upcoming meeting on 6 June.
  • Inflation is anticipated to remain above the 2.5% target in H1 2019 due to wage pressures.
  • The NBP is likely to initiate monetary tightening in H2 2019, despite temporary inflationary spikes.

• India (RBI):

  • The central bank is expected to take a more hawkish stance, potentially leading to two 25bp rate hikes in H2 2018, raising the repo rate to 6.50%.
  • The recent Q1 GDP growth of 7.7% y/y is seen as a positive signal for the recovery, giving the MPC confidence to address inflation.

• Brazil (BCB):

  • Conducted a one-off FX swap auction on 5 June, offering up to USD 1.5bn for swaps maturing in August, October, and December 2018.
  • No changes to the existing roll-over program or daily FX swap offerings.
  • The USDBRL is currently above its fair value, indicating potential overvaluation.

• Malaysia (Bank Negara):

  • Governor Muhammad Ibrahim resigned midway through his 5-year term amid an investigation into a land sale.
  • His successor will be appointed by the King, with local media suggesting former deputy governor Nor Shamsiah Mohd Yunus may be appointed.

Currency Forecasts

Argentina (USDARS):

• Updated forecasts:
  • USDARS is expected to trade at 28.5 by Q4 2018 and 31.0 by Q4 2019.
  • Worst-case scenario: USDARS could reach 33.2.
• The ARS lacks a clear catalyst for recovery; IMF support and carry trade may not be sufficient to offset external and internal imbalances.
• The political environment has worsened, increasing uncertainty around the presidential election.
• The team is flat on Argentine assets after being short since Q3 2017, with long protection via CDS.
• A bearish bias is maintained due to ongoing economic and political challenges.

Regional Market Outlook

Asia:

• Asian equity and FX markets opened stronger, despite a slight increase in 10y UST yields.
• Risk sentiment is influenced by headline risks ahead of the G-7 Summit on 8 June.
• The RBI is under scrutiny for potential rate hikes, with a likely path of two 25bp hikes in H2 2018.

CEEMEA:

• South Africa (SA):
  • Q1 2018 GDP growth fell to -2.2% q/q, down from +3.1% in Q4 2017.
  • The slowdown was broad-based, highlighting ongoing issues with growth, productivity, and revenue.
  • Revised 2018 growth forecast to 2.0% from 2.2%.
  • The SARB is expected to begin policy loosening in November 2018.

Legal and Compliance Notes

• This document is non-independent research and may be subject to conflicts of interest.
• It is intended for Professional Clients and Eligible Counterparties under MiFID II.
• No investment, financial, legal, or tax advice is provided.
• The content may contain hypothetical or back-tested performance data, which is for illustrative purposes only.
• Indicative prices are based on internal models and may vary significantly from other sources.
• Confidentiality is maintained; the document may not be copied or distributed without prior consent.
• No liability is accepted for any losses arising from reliance on the document's content.

Contacts

Disclaimer

• This document is for information purposes only and does not constitute an offer to sell or issue securities.
• It may include indicative prices, which are not actual transaction terms.
• No liability is accepted for any use or reliance on the document's content.
• Performance data is not indicative of future results and may not reflect real-world market conditions.
• Simulated performance may exclude liquidity, fees, and transaction costs.
• Legal and regulatory disclosures apply, and the document may be subject to different jurisdictions' rules.
• ETF and options disclosures are included, emphasizing the risks and complexity of such instruments.
• Restricted securities may be discussed, available only to Qualified Institutional Buyers or non-US persons.

Additional Information

• BNP Paribas Global Markets Website: www.globalmarkets.bnpparibas.com

• Bloomberg Research:

  • Fixed Income Research: BPFR
  • Emerging Markets Research: BPFR
  • G10 Interest Rate Research: BPBS
  • Market Economics: BPEC

• United States Disclosures:

  • The report may be distributed only to institutional investors or major U.S. institutional investors.
  • Options and ETFs are complex instruments, and certain securities may not be registered under U.S. law.
  • Restricted securities are available only to QIBs or non-U.S. persons.
  • BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed.

Summary of Key Views

• Poland: NBP likely to hold rates, with inflation expected to remain above target into H1 2019, leading to tightening in H2 2019.
• India: RBI may hike rates in H2 2018, with two 25bp increases expected.
• Brazil: FX swap auction conducted, but no policy changes. USDBRL is overvalued.
• Malaysia: Governor resignation, with potential successor named soon.
• Argentina: USDARS is expected to rise, but lacks a clear catalyst for recovery.
• South Africa: Q1 GDP was a negative surprise, with revised growth forecast to 2.0% for 2018.
• Risk sentiment: Positive in Asia, but remains cautious due to G-7 Summit risks.
• Political and economic uncertainty: Particularly in Argentina and South Africa, influencing market outlook.