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EM STRATEGY | GLOBAL WEEKLY SUMMARY

Core Content

This document outlines the current state and outlook for Emerging Markets (EM) strategies as of 9 February 2018. It is produced by the BNP Paribas EM Strategy Team, including experts from London, Singapore, and Turkey branches, as well as from Banco BNP Paribas Brasil S.A. The report highlights the resilience of EM markets amid global volatility and provides specific trading recommendations across FX, interest rates, and credit instruments.

Main Viewpoints

• EM Resilience: Emerging markets have remained relatively unscathed compared to developed markets due to strong global trade, significant carry, a stable CNY, and limited steepening of the US yield curve.
• Short-Term Outlook: EMs are expected to stay resilient in the coming months, but a more negative outlook is anticipated later in the year as US yields rise and the yield curve steepens.
• FX Recommendations: The team recommends buying a USDBRL put spread and taking profit on the long USDKRW position. In Turkey, they suggest paying 1y1y TRY cross-currency rates to position for a slower rate-cutting path.
• Interest Rates: The report highlights that the Jan-21 yield in Brazil is too high relative to the model. The team also recommends a bullish position in BRL, as it is below the model's fitted value.
• Credit Instruments: The team recommends long positions in certain credit instruments, including the Jun19 UDIBonus and a spread between Argentina and Brazil/Colombia/Mexico CDS.

Key Information

Asia

• USDCNY: The RMB has appreciated too quickly against the USD, which could lead to a correction in the next one or two months.
• USDKRW: The team has taken profit on their long USDKRW recommendation. They believe the won is no longer over-owned and expect volatility to persist.
• Market Conditions: EM FX has shown limited sell-off, with the most affected countries being those with large current account deficits and those sensitive to oil and commodity prices.

CEEMEA

• Hungary: The National Bank of Hungary will hold a third IRS tender. It plans to issue HUF 1.2trn for the year.
• Poland: January CPI data is expected to show a fall in inflation. The central bank is likely to keep rates on hold until CPI reaches the target.
• Turkey: The team recommends paying TRY 1y1y cross-currency rates at 13.28%, targeting 13.60%, with a stop loss at 13.00%. The current strategy of the central bank suggests higher rates for longer.

Latam

• Brazil: The BCB is expected to keep policy rates unchanged at the March meeting. The DI curve's belly is overpriced, making it a sweet spot for receivers.
• Argentina: The central bank is expected to leave the repo rate unchanged at 27.25%. The team advises avoiding structural long positions in the peso due to uncertainty.

New Recommendations

Trade Review

What's Up Next Week?

Asia

• China, Taiwan, South Korea, Indonesia, Malaysia: Markets will be closed due to Chinese New Year.
• Thailand and Indonesia: Central banks will hold policy meetings. Both are expected to keep policy on hold.
• India: CPI data for January is expected to be released on 12 February, which is closely watched by the central bank.
• China: Monetary aggregate figures for January will be released, likely distorted due to the New Year.

CEEMEA

• Hungary: January CPI data will be released on 13 February.
• Poland: January CPI data will be released on 15 February. The central bank is expected to keep rates on hold until CPI hits the target.
• Poland and Hungary: Central bank governors will speak in Budapest on 12 February.

Latam

• Brazil: Minutes of the monetary policy meeting will be released on 15 February. The BCB is expected to keep rates unchanged.
• Argentina: The central bank will announce its decision on the 7-day repo rate on 14 February. The team expects no change in rates.

Risk Premium Model

• The Global Risk Premium has risen to its highest value since March 2016, indicating a supportive environment for EM prices in the short term.
• However, the team cautions that a structural reversal is not yet in sight.

Key Charts

• Chart 1: EM 10-year bond yield still provide attractive premium
• Chart 2: 2y10y US yield steepness is a key driver of EM equities
• Chart 3: Financing of current account deficit
• Chart 4: Portfolio Flows of offshore investors
• Chart 5: CBRT's FX operations
• Chart 6: External debt payment schedule

Summary of Key Drivers

• US Rates: A key factor in EM local interest rates.
• Global Financial Conditions: Influence EM markets significantly.
• Global Risk Premium: Has moved to supportive levels.
• CNY Strength: Has supported EM markets, but may lead to corrective weakness.
• Carry Trade: Still a significant factor in EM FX movements.

Conclusion

The EM Strategy Team remains cautiously optimistic about EM resilience in the short term, but anticipates a more challenging environment later in the year. They recommend a mix of FX, interest rate, and credit trades to capitalize on current market conditions.