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EM Strategy Daily Summary - 31 January 2018

Core Content Overview

This document provides an analysis of Emerging Markets (EM) strategy and market developments for 31 January 2018, focusing on key events and trends in the US, CEEMEA, and Asia. It includes insights from BNP Paribas' research teams and highlights strategic recommendations for investors.

Key Market Developments

US: FOMC Policy Meeting

• The FOMC is in focus, with little chance of policy change.
• Markets are pricing in an uneventful meeting, with no press conference or new projections.
• The FOMC may upgrade language on economic activity, which could be seen as a marginally hawkish shift.
• This is Chair Yellen's final FOMC meeting, and the statement may reflect improved data on economic performance.

CEEMEA: External Financing and IIP Analysis

• The Strategy team extended analysis on external financing needs and International Investment Position (IIP).
• The US has a large negative IIP, while EM countries have improved their positions.
• Tapering in 2013 caused a surge in inflows to the US, leading to USD appreciation and a shift in EM capital flows.
• The Strategy team remains bullish on CEEMEA assets and recommends holding HUF 5y IRS and long EURHUF.
• The US IIP and long-term inflation expectations are key indicators for future capital flows.

Asia: FX and Bond Market Insights

• Asian FX markets recovered in early trading after two days of losses.
• China's 5Y Government Bonds (CGBs) are recommended for purchase, as CDB bonds have been heavily sold.
• CGBs have shown relative resilience compared to CDBs.
• The Strategy team believes the market has already priced in regulatory impacts and asset management curbs.
• China's January manufacturing PMI remained strong at 51.3.

South Africa and Turkey

• In South Africa, the ANC is likely to announce President Zuma's removal on 8 February.
• Eskom's financial situation remains weak with declining revenues and rising costs.
• Turkey's trade balance worsened to USD -9.2bn, reflecting continued economic challenges.

South Korea

• The market expects January CPI to decline to 1.3% from 1.5%, indicating a more tempered inflation environment.
• The central bank is expected to hike rates only once this year, contrary to market expectations of two hikes.
• The Strategy team remains positioned to receive 1y1y Korea NDIRS at 2.20%.

Strategic Recommendations

• China 5Y Government Bonds: Buy at current levels due to strong fundamentals and relatively better performance compared to CDB bonds.
• CEEMEA Assets: Maintain a long position due to expected USD depreciation and capital inflows.
• Hungary: No change in policy rates, but the MNB has adjusted its stance to align more closely with Euro Area yields.
• South Africa: Monitor political developments and Eskom's financial situation, with potential bond issuance in April and July/August.
• South Korea: Expect a single rate hike this year, with a focus on 1y1y NDIRS at 2.20%.

Key Data Releases

• China: January manufacturing PMI (strong at 51.3).
• South Africa: December trade balance data (to be released this morning).
• Turkey: Trade balance data (released earlier, worsening to USD -9.2bn).
• South Korea: January CPI data (expected to slide to 1.3%).

Contacts

Legal and Regulatory Information

• This document is non-independent research and may be subject to conflicts of interest.
• It is a marketing communication and not investment research under MiFID II.
• Information is based on public sources and may not be independently verified.
• No assurance is given regarding the accuracy or completeness of the information.
• Indicative prices are for reference only and do not represent actual transaction terms.
• The document is intended for professional clients and eligible counterparties only.
• It does not constitute a prospectus or public offering and is not suitable for retail investors.

Additional Information

• The document includes charts and tables for reference.
• Legal disclaimers apply to all investment, ETF, and derivatives-related content.
• The document may contain performance data based on back-testing, which is for illustrative purposes only.
• BNPP may have financial interests in the securities discussed and may act as a market maker or advisor.