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EM Strategy Daily Summary - 15 November 2017

Core Content

This document is a summary of the Emerging Markets (EM) Strategy team's analysis and outlook for the day, focusing on key economic indicators, currency movements, and market developments in the EM region and related markets.

Main Points

1. US CPI and EM FX Impact

• US CPI is in focus today, with the data unlikely to derail expectations for a December rate hike, which is already fully priced in.
• An upside surprise in the CPI could accelerate the correction in risky assets, including equities and oil, which may further pressure EM currencies.
• The Turkish lira (TRY) remains vulnerable to front-end US rate movements. USDTRY broke through 3.90 yesterday, and the front-end premium is unstable.
• The team remains bullish on a further move to 3.95 in USDTRY and expects a flattening of the front-end of the cross-currency curve.
• Weak bids in Turkish Treasury auctions saw a total sale of TRY 2.6bn, against a monthly target of TRY 5.2bn.
• The Turkish Treasury has strengthened its cash balance in Q3, and is expected to continue this strategy until February 2018, when domestic debt redemption will increase to TRY 20bn.

2. Oil Market Developments

• Oil prices fell over 2.5% yesterday due to above-expectations US inventory data.
• The Russian Energy Minister is meeting with domestic producers to determine the country's position on supply cut extensions ahead of the OPEC meeting on 30 November.
• Several countries, including Saudi Arabia and Angola, have expressed support for extending production cuts beyond Q1 2018.
• Net long speculative positions in oil have reached February 2017 levels, indicating a high potential for unwinding if the production cut extension disappoints.

3. Latin America (Latam) Outlook

• Mexico is expected to hold preliminary discussions with the US and Canada ahead of the fifth round of NAFTA negotiations (17–21 November).
• In Brazil, the team has closed a long USDBRL hedging structure with a profit of 1.84%.
• The Risk index in Brazil has converged towards neutrality, suggesting a reduced likelihood of further sell-offs.

4. EM FX & CDS Market

• Asian equities are weak today, in line with global trends.
• Asian CDS spreads are 5bp wider.
• The USD is opening weaker against majors, but the ample supply of dollars is helping to mitigate the negative impact on EM FX from the equity correction.

5. Key Contacts

• The document includes a list of EM Strategy contacts, including:
  • Wike Groenenberg (Head of Emerging Markets Research, CEEMEA & APAC)
  • Piotr Chwiejczak and Sai Ulluri (FX & IR CEEMEA Strategists)
  • H. Erkin Isik, CFA (FX & IR CEEMEA Strategist at Turk Ekonomi Bank A.S.)
  • Gustavo Mendonca (FX & IR Latam Strategist)

Key Information

• Market Outlook: EM currencies are under pressure due to the correction in risky assets, with the Turkish lira being the most vulnerable.
• CPI Impact: While the US CPI data is unlikely to change rate hike expectations, an upside surprise could trigger further market volatility.
• Oil Market: The market is sensitive to production cut extensions, and the possibility of a disappointing outcome could lead to significant unwinding of long positions.
• Regional Developments:
  • Mexico is preparing for NAFTA negotiations.
  • Brazil has seen a profitable hedge closure and reduced risk.
  • Asia is experiencing weak equity and rising CDS spreads.
• Strategic Actions:
  • The team has taken positions on USDTRY and USDBRL.
  • The front-end of the cross-currency curve is expected to flatten.
• Legal & Disclaimer Notes:
  • The document is non-independent research and is a marketing communication.
  • BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
  • No guarantees are made regarding the accuracy, completeness, or performance of the information or instruments discussed.
  • The document is not investment advice, and recipients are advised to seek independent professional advice before making any investment decisions.

Summary

The report outlines the EM strategy team's expectations for the day, emphasizing the potential impact of the US CPI data on global markets, the continued weakness in the Turkish lira, and the broader implications for EM FX. It also highlights the oil market's sensitivity to supply cut extensions and the preparations for NAFTA negotiations in Mexico. The team has taken strategic positions in the market and remains cautiously optimistic about certain EM currencies and instruments. However, the report clearly states that all information is for discussion purposes only and is not to be relied upon as an investment recommendation.