Emerging Markets: What Changed

The PBOC will resume use of the counter-cyclical factor for the CNY fix.

Thailand junta leader announced that elections are likely on February 24.

Russia will issue new economic forecasts next week that will likely reflect the negative impact of sanctions.

Russia central bank suspended its FX purchases through the end of September.

President Trump issued a critical tweet regarding South Africa’s controversial plans for land reform.

Turkey was downgraded by both S&P and Moody’s.

Mexico President-elect Andres Manuel Lopez Obrador said he will not auction off any new oil blocks for at least two years.

Venezuela devalued the bolivar and somehow tied it to its sovereign “petro” cryptocurrency.

In the EM equity space as measured by MSCI, South Africa (+6.4%), Mexico (+4.8%), and Indonesia (+4.6%) have outperformed this week, while Brazil (-3.1%), Hungary (-1.5%), and UAE (-0.6%) have underperformed. To put this in better context, MSCI EM rose 2.8% this week while MSCI DM rose 1.1%.

In the EM local currency bond space, South Africa (10-year yield -14 bp), Hungary (-13 bp), and Turkey (-11 bp) have outperformed this week, while Brazil (10-year yield +40 bp), Argentina (+6 bp), and Thailand (+3 bp) have underperformed. To put this in better context, the 10-year UST yield fell 5 bp to 2.82%.

In the EM FX space, ZAR (+2.5% vs. USD), COP (+2.5% vs. USD), and THB (+1.6% vs. USD) have outperformed this week, while BRL (-4.2% vs. USD), ARS (-2.1% vs. USD), and RUB (-0.4% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.8% this week.

The PBOC will resume use of the counter-cyclical factor for the CNY fix. The bank reportedly contacted yuan-fixing banks and said they can use that factor again starting Monday when calculating their fix submissions. Given that the yuan has been relentlessly weakening against the dollar (like the rest of EM FX), this supports our view that policymakers are not pursuing a weak yuan policy. Note that the CNY counter-cyclical factor was phased out back in January.