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EM STRATEGY DAILY - 15 February 2018 Summary

Core Content Overview

This document provides an analysis of key events and market outlooks for Emerging Markets (EM) on 15 February 2018. It includes insights on interest rates, inflation data, currency dynamics, and market holidays affecting EM regions. The report is produced by BNP Paribas and outlines strategic views from their research teams in various regions.

Main Points and Market Outlooks

United States

• Yields: US yields increased significantly following the release of January CPI data, which was higher than expected.
• Swap Yield: The US 2y swap yield reached a new cycle high at 242bp, while the yield curve slope remained unchanged.
• Market Focus: The key driver for the USD is the slope of the yield curve rather than the level of front-end yields.

CEEMEA (Central and Eastern Europe, Middle East, and Africa)

• South Africa: Jacob Zuma resigned as President of South Africa immediately after a police raid on the Gupta family home, though he did not reference the event in his interview.
• Egypt: The Central Bank of Egypt is expected to cut the repo rate from 19.75% today due to a sharp decline in January CPI inflation to 17.1% from 21.9%, making real rates positive for the first time.
• Policy Outlook: The path of rate cuts this year will be cautious, as highlighted by the January IMF report.
• Poland: January CPI data will be released today, with expectations of a fall to 2.0%, in line with consensus estimates.
• Hungary: The National Bank of Hungary will conduct a third IRS tender today, with the central bank confirming a HUF 1.2tn plan for the year.

Latin America (Latam)

• Brazil: The BCB (Brazilian Central Bank) will release its monetary policy meeting minutes today, indicating that the base case scenario is to keep policy rates unchanged at the March meeting.
• Policy Focus: The market is expected to shift focus from the terminal Selic rate to the likelihood of prolonged rate hold, which may lead to re-pricing of the DI curve (Jan 20 to Jan-21).
• Market Impact: This shift is anticipated to benefit receivers, as the belly of the DI curve becomes the sweet spot for investment.

Asia

• Chinese New Year Holidays: Several countries will be affected by the Chinese New Year, with markets in Taiwan and China closed for a week, South Korea on holiday for two days, and Indonesia, Malaysia, and Singapore on holiday tomorrow.
• Bank Indonesia: The central bank is expected to keep policy rates on hold, relying on macro-prudential measures to stimulate the economy. Potential easing of downpayment rules for house and motorbike purchases in underperforming provinces is being considered.
• FX Markets: Asian FX markets reacted with slight declines, though the market reaction was contained, and regional equities gained.

Key Information and Insights

• Interest Rate Trends: In Egypt, real rates are now positive, suggesting potential for policy loosening. In Poland, inflation is expected to fall, leading to a likely rate hold by the National Bank of Poland until Q3 2018.
• Currency Vulnerability: Turkey is increasingly reliant on short-term capital flows to finance its current account deficit, raising concerns about vulnerability to global liquidity changes.
• Market Holidays: The Chinese New Year will impact FX and equity markets in several Asian countries, with varying durations of closure.
• Research and Strategy Contacts: The document includes a list of EM strategy contacts with their respective roles, legal entities, and phone numbers for further inquiries.

Charts Mentioned

• Chart 1: Shows that Egyptian real rates are now positive, indicating potential for policy easing.
• Chart 2: Highlights Turkey's growing reliance on short-term capital flows for financing its current account deficit.

Legal and Regulatory Notice

• Non-Independent Research: This document is non-independent research for the UK FCA and may be subject to conflicts of interest.
• Marketing Communication: It is a marketing communication and not investment research.
• Confidentiality: The information is provided on a strictly confidential basis, and recipients agree not to distribute it without prior consent.
• Disclaimer: The document does not constitute an offer to sell or issue any financial instrument, nor should it be relied upon as authoritative. It is not intended to provide investment, tax, or legal advice.

Conclusion

The report outlines the market dynamics and policy expectations for key EM regions, emphasizing the impact of inflation data, central bank decisions, and external factors like the Chinese New Year on financial markets. It serves as a strategic overview and provides contact details for further engagement with BNP Paribas EM research teams.