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EM Strategy Summary - 26 March 2018

Core Content

This document outlines the key market developments and strategic views for Emerging Markets (EM) as of 26 March 2018, with a focus on trade tensions, central bank policies, and FX market dynamics across various regions.

Main Views and Key Information

Trade Tensions and Risk Sentiment

• The threat of escalating trade protectionist policies continues to negatively impact risk sentiment.
• The document emphasizes a significant deterioration in trade relations rather than a full-blown trade war.
• China's exports of high-tech machinery and transport goods to the US are particularly vulnerable to further US tariffs.
• Higher US tariffs may initially weaken the USD, but further escalations could lead to a stronger USD due to risk-off behavior.

Central Bank Meetings and Policy Outlook

• Central bank meetings in South Africa, Hungary, Czech Republic, Egypt, and Argentina are expected this week.
• South Africa: The Reserve Bank of South Africa (SARB) is expected to cut the policy rate by 25bp to 6.50%. Moody's has maintained South Africa's investment-grade rating with an improved outlook.
• Egypt: The central bank is expected to cut the deposit rate by 100bp to 16.75%, following a previous cut in February. The central bank is likely to be cautious due to inflation concerns.
• Hungary: The MNB is expected to keep policy rates on hold. The central bank is using alternative tools to stimulate inflation, which remains below its 3% target.
• Czech Republic: The Czech National Bank (CNB) is likely to keep rates unchanged, but may become more hawkish if the CZK weakens significantly.
• Argentina: The BCRA is expected to keep the policy rate at 27.25%. FX interventions have been ongoing, but the peso remains under pressure due to twin deficits.
• Brazil: The COPOM meeting minutes will provide insights into the central bank's dovish stance. The DI curve is expected to rally further with a 25bp cut anticipated for the May meeting.
• Poland: The minutes from the March MPC meeting may signal a potential rate cut, with the belly of the curve rallying and the PLN weakening.

FX Market Outlook

• Asian FX markets show limited price action, with the ADXY forming a triangle pattern.
• The document cautions against chasing trends without significant trading activity.
• In Turkey, the CBRT may increase FX forward sale auctions if the TRY continues to depreciate. A rate hike of 25-50bp is expected at the April MPC meeting.
• The inclusion of Chinese government and policy bank bonds in the Bloomberg Barclays Index is expected to attract inflows, but the impact will be gradual over 20 months.

Regional Developments

• Tunisia: The IMF has approved the third installment of a $2.8 billion loan program.
• Croatia: S&P raised the sovereign rating to BB+ from BB with a stable outlook.
• China: Guo Shuqing has been named as PBoC's Communist Party Chief, while Yi Gang controls the central bank's operations. This marks a shift in the division of responsibilities.
• India, Korea, Taiwan: NDF markets have seen volume spikes in response to China's tariff announcements.

Charts and Data Highlights

• Chart 1: Machinery and transport dominate US imports from China, highlighting the sector's vulnerability to tariffs.
• Chart 2: A significant portion of these imports are high-tech, making them susceptible to US tariffs.

Strategy Contacts

Legal and Disclaimer Notes

• The document is a marketing communication and not independent research.
• It is not intended as investment advice and should not be relied upon for making investment decisions.
• BNPP may have conflicts of interest due to its involvement in trading, underwriting, and advisory services.
• The information is based on public sources and may not be independently verified.
• All estimates and opinions are subject to change and are not guaranteed to be accurate or complete.

Additional Resources

• Online: BNP Paribas Global Markets Website
• Bloomberg:
  • Fixed Income Research (BPFR)
  • G10 Interest Rate Research (BPBS)
  • Emerging Markets Research (BPFR)
  • Market Economics (BPEC)

United States Disclosures

• Options: Complex instruments not suitable for all investors, with potential for high risk.
• ETFs: May involve tracking error, currency, and geopolitical risks. BNPP may have conflicts of interest due to its involvement in ETFs.
• Unregistered Securities: May be restricted and only available to Qualified Institutional Buyers (QIBs) or non-US persons.