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EM Strategy Daily Summary - 30 October 2017

Core Content

This document is a summary of the Emerging Markets (EM) Strategy Daily report for 30 October 2017, issued by BNP Paribas. It outlines key market developments, central bank actions, and strategic recommendations for EM and related markets, including FX and IR.

Main Views

• Global Sentiment and Inflation Expectations:

  • Global sentiment remains skewed towards a repricing of inflation expectations, which may affect risk appetite.
  • The report highlights potential winners and losers in EM in the event of a liquidity squeeze, particularly focusing on the CEEMEA and Latam regions.

• Czech Republic (CNB):

  • The CNB is expected to raise policy rates by 25 basis points on Thursday (2 November).
  • Inflation forecasts are likely to be revised upward, though not necessarily above market expectations.
  • The central bank may be cautious about overtightening policy due to expected disinflation from base effects and currency appreciation.
  • The team attempted to receive 2y2y CZK rates as a spread over EUR rates, but the position was stopped out. They will reconsider opening receivers after the inflation report.

• Turkey (CBRT):

  • The CBRT will release its quarterly Inflation Report on Wednesday (1 November), with a presentation by Governor Murat Cetinkaya.
  • Inflation data will follow on Friday (3 November). Forecasts are expected to be revised upward, especially for end-2017, but may appear too low given recent TRY depreciation.
  • The CBRT is likely to keep policy unchanged, despite a fall in headline inflation, due to limited tightening room and a delayed MPC meeting until 14 December.
  • The currency remains vulnerable to global risk sentiment and local news.

• Poland:

  • October inflation data is expected to be published on Wednesday (1 November), with a headline CPI rate forecast at 2.0% y/y.
  • Manufacturing PMIs for South Africa, Russia, and the Czech Republic are expected on Wednesday, and for Poland and Hungary on Thursday. These PMIs are likely to remain above 50, reflecting strong economic activity.

• Latam (Brazil):

  • The release of BCB policy meeting minutes on Tuesday (31 October) will be closely watched for future policy signals.
  • The team expects a terminal Selic rate of 6.5% by next year and anticipates the BCB to remain on hold longer than the DI curve suggests.
  • The outlook for rates is tilted to the downside, but rapid rate declines are unlikely due to local macro fund positioning and lack of clear short-term drivers.

• Mexico:

  • Q3 GDP data will be released on Tuesday (31 October).
  • The focus is likely on the MXN following the announcement of USD 4bn in FX hedging tool auctions.

• Asia:

  • The Asia Strategy team closes its short EUR vs. INR recommendation, as the pair reaches a target for a 3.5% profit.
  • They see more potential for INR to outperform EM peers and are looking for further buying opportunities.

• US President's Asia Trip:

  • President Trump begins a 12-day trip to Asia, focusing on trade and geopolitical issues.
  • The China-US relationship is a key point of attention, with concerns about unresolved trade imbalances and North Korea.

• PMI Data in Asia:

  • PMI data across countries will be released around the turn of the month.
  • South Korea will release its business confidence survey, CPI, and trade data. There is a 50% chance the BoK will hike rates in its November meeting.
  • Thailand and Indonesia will also report CPI data on Wednesday.

Key Information

• Strategy Contacts:

  • The document includes contact details for key strategy team members across various regions, including CEEMEA, Latam, and Asia.

• Legal and Disclaimer Information:

  • The document is non-independent research and constitutes a marketing communication under MiFID.
  • It does not provide investment, financial, legal, or tax advice.
  • BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed in the document.
  • The document may include back-tested performance data, which is for illustrative purposes only and not indicative of future results.

• Market Actions:

  • The team closed a short EUR vs. INR position with a 3.5% profit.
  • The document includes details on FX and IR strategies, central bank meetings, and economic indicators.

Summary

The report provides an overview of EM market dynamics, highlighting the impact of inflation expectations on risk appetite and liquidity conditions. It outlines expected central bank actions in the Czech Republic and Turkey, with a focus on policy rate changes and inflation forecasts. In Latam, Brazil and Mexico are under close scrutiny, with the BCB expected to remain on hold. In Asia, the team sees potential for INR to outperform and closes a short EUR vs. INR recommendation. The document also includes legal disclaimers and details on market participants and their roles.