Emerging Markets: What Has Changed – Friday, July 21

Written by my colleague Dr. Win Thin

South Korea proposed resuming military and humanitarian exchanges with North Korea.

The European Union may sanction Poland over its controversial judicial overhaul.

Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan.

Turkey’s worsening relations with Germany will come with economic costs.

South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%.

Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets

S&P raised the outlook on Mexico’s BBB+ rating from negative to stable.

In the EM equity space as measured by MSCI, South Africa (+1.8%), Chile (+1.6%), and China (+1.5%) have outperformed this week, while Indonesia (-1.8%), Russia (-1.5%), and Colombia (-1.5%) have underperformed. To put this in better context, MSCI EM rose 1.2% this week while MSCI DM rose 0.5%.

In the EM local currency bond space, Brazil (10-year yield -23 bp), South Africa (-17 bp), and Russia (-10 bp) have outperformed this week, while Chile (10-year yield +10 bp), Colombia (+4 bp), and China (+4 bp) have underperformed. To put this in better context, the 10-year UST yield fell 10 bp to 2.33%.

In the EM FX space, BRL (+1.9% vs. USD), KRW (+1.3% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while ARS (-3.0% vs. USD), PLN (-1.4% vs. EUR), and ILS (-0.4% vs. USD) have underperformed.

South Korea proposed resuming military and humanitarian exchanges with North Korea. President Moon Jae-in promised a different approach to North-South relations from the hardline approach taken by his predecessor Park Geun-eh. The announcement came after North Korea signaled a willingness to engage. Moon has already suspended the controversial missile shield, so we may see some further thawing of relations.

The European Union may sanction Poland over its controversial judicial overhaul. The European Commission confirmed it is close to starting a procedure that could eventually lead to a loss of Poland’s EU voting rights under Article 7 of the EU treaty. The judicial revamp would force all Supreme Court judges to retire and would give the government more say over new picks for the judiciary.