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EM STRATEGY DAILY - 19 April 2018 Summary

Core Content

This document is a daily Emerging Markets (EM) Strategy report, summarizing key economic and market developments across various regions, including CEEMEA, Asia, and Latin America (Latam), with insights from BNP Paribas analysts. It also includes contact information for the strategy team and legal disclaimers regarding the nature of the research and potential conflicts of interest.

Main Points

Turkey

• Election Announcement: The President of Turkey announced early presidential and parliamentary elections on 24 June, earlier than the previously scheduled November 2019.
• Market Reaction: USDTRY fell by 2% to 4.02, and the 10y bond yield dropped by 35bp to 12.72%.
• Policy Outlook: The Central Bank of the Republic of Turkey (CBRT) is expected to raise interest rates next week to prevent a currency selloff before the elections.
• Investment Recommendations:
  • Buy 10y local bonds (FX unhedged), targeting 12.5%.
  • Consider a 1m fwd 3m x 9m TRY CCY flattener targeting 50bp.

South Africa

• Inflation Data: Headline CPI inflation slowed to 3.8% y/y in March from 4.0% in February, below the forecast of 3.9% and the market expectation of 4.1%.
• Inflation Outlook: Headline inflation is expected to rise to around 5.0% in April due to the VAT hike and increased fuel price inflation.
• Monetary Policy: A rate cut of 25bp is still considered likely, but depends on currency stability, oil price movements, and the next inflation expectations survey (scheduled for 19 July MPC meeting).

Russia

• Currency Movement: The rouble gained about 1% against the dollar, reflecting weaker U.S. rhetoric and a slowdown in trade tensions.

Bank Indonesia

• Policy Decision: The central bank is expected to keep policy on hold today.
• Economic Context: Despite sluggish GDP growth and slow credit pickup, previous rate cuts have not improved the situation.
• Tools Used: The central bank is shifting to macroprudential tools, including reserve ratio cuts introduced in January, effective from July/October.

China

• SAFE Announcement: China's State Administration of Foreign Exchange (SAFE) indicated USD under pressure, suggesting no imminent revaluation of the yuan.
• Yuan Reaction: The yuan strengthened on the news.
• QDLP/QDIE Quotas: SAFE raised QDLP and QDIE quotas, allowing Chinese investors to invest offshore, likely to curb outflows from the HKD.
• HKD Reaction: The HKD rallied 6 bps.
• Uncertainty: The move is considered reactive, and the HKD may test the 7.85 weak side of the trading band.

Brazil

• Inflation Forecast Cut: Inflation forecasts for 2018 and 2019 were cut by 0.5pp to 3.0% and 3.5%, respectively.
• Reasons for Forecast Adjustment:
  • Softer than expected growth.
  • Good harvest and rains.
  • Structural factors like benign inflation inertia and limited participation of public sector banks in the credit market.
• Fund Positioning: Local macro hedge funds have decreased their allocation in Brazilian risk assets and shifted to a short position on the BRL.

Key Information

• The report is produced by BNP Paribas London Branch and includes insights from multiple strategists across different regions.
• The document is non-independent research and is a marketing communication under MiFID II.
• It is not intended as investment advice and should not be relied upon for making investment decisions.
• The report may include performance data based on back-testing, which is for illustrative purposes only.
• The information is provided on a confidential basis and may not be distributed without prior written consent.
• Legal disclaimers emphasize that the document does not constitute an offer to sell or issue securities, and that BNPP may have conflicts of interest due to its involvement in transactions related to the instruments discussed.

Strategy Contacts

Legal Notice

• The document is a marketing communication and is not investment research.
• It is not prepared in accordance with legal requirements for independent investment research.
• It may include "Research" as defined under MiFID II unbundling rules, intended for firms in scope of the rules who have signed up for BNP Paribas Global Markets Research packages or those out of scope.
• BNPP may have financial interests in the issuers or entities mentioned, and may act as an advisor, manager, underwriter, or market maker in the financial instruments discussed.
• The information may not be accurate or complete and is subject to change without notice.
• The indicative prices and terms provided are for information purposes and do not represent actual transaction terms.
• The document may contain back-tested performance data, which is for illustrative purposes only and does not reflect actual market conditions or liquidity constraints.

Online Resources

• BNP Paribas Global Markets Website: www.globalmarkets.bnpparibas.com
• BNP Paribas Strategy Website
• Bloomberg Research:
  • Fixed Income Research: BPFR
  • G10 Interest Rate Research: BPBS
  • Emerging Markets Research: BPFR
  • Market Economics: BPEC

US Disclosures

• Options and ETFs discussed are complex and may involve high risk.
• The document may include securities not registered under U.S. Securities Laws, which are considered "restricted securities."
• The report may be distributed only to qualified institutional buyers or non-U.S. persons.
• BNPPSC is responsible for the content of the report and is registered with the SEC, CFTC, FINRA, and NFA.

UK & France Disclosures

• The document is produced and distributed by BNP Paribas London Branch and BNPP SA/BNPP Arbitrage.
• Legal entities are authorized and supervised by ECB, ACPR, and other relevant authorities.
• The document is not a prospectus and does not constitute an offer to sell securities in the UK or France.