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from Breakingviews:

Russia harms the BRICs and adds to global risks

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By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BRICs? Perhaps it should be shortened to BICs. Russia’s intervention in Ukraine is a big blow to the Russian economy and also to other embattled emerging economies. It’s not good for the global picture either, as the redirection of funds makes developed markets more bubbly and vulnerable.

The damage begins in Russia itself. The Russian rouble’s drop provoked a 1.5 percentage point rise in the central bank’s interest rate to 7 percent. That will weigh on an already weak economy. Capital flight will be exacerbated and investor confidence shaken, not just in the short term.

The damage spreads. Boston-based EPFR, a fund-tracker, reports that $18.6 billion flowed out of emerging-market equity funds from Jan. 1 to Feb. 5, more than the $15.2 billion outflow in the whole of 2013. Russia’s manoeuvres in Ukraine may frighten more investors.

from Global Investing:

Emerging equities: out of the doghouse

Emerging stocks, in the doghouse for months and months, haven't done too badly of late. The main EM index,  has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500's 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank's monthly investor survey.  Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.

Undoubtedly, the postponement of the Fed taper is the main reason for the rally.  Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .

from Global Investing:

Bernanke Put for emerging markets? Not really

The Fed's unexpectedly dovish position last week has sparked a rally in emerging markets -- not only did the U.S. central bank's all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as "a triple whammy for EM." A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy -- the assumption, dating back to Alan Greenspan's days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money -- remember the cacophony at this month's G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan's June 12 article on the EM-Fed linkages)

from Global Investing:

Russian stocks: big overweight

Emerging stocks are not much in favour these days -- Bank of America/Merrill Lynch's survey of global fund managers finds that in August just a net 18 percent of investors were overweight emerging markets, among the lowest since 2001. Within the sector though, there are some outright winners and quite a few losers. Russian stocks are back in favour, the survey found, with a whopping 92 percent of fund managers overweight. Allocations to Russia doubled from last month (possibly at the expense of South African where underweight positions are now at 100 percent, making it the most unloved market of all) See below for graphic:

BofA points out its analyst Michael Harris recently turned bullish on Russian stocks advising clients to go for a "Big Overweight" on a market that he reckons is best positioned to benefit from the recovery in global growth.

from MacroScope:

Turning up?

Manufacturing PMI surveys for euro zone countries and Britain will be the latest litmus test of the durability of fledgling economic recoveries.

Even the readings from Spain and Italy have shown improvement over the summer so it may well be that they are the most interesting given we’ve already had flash readings for the euro zone, Germany and France which showed business activity across the currency bloc picked up faster than expected in August.

from Global Investing:

Tapping India’s diaspora to salvage rupee

What will save the Indian rupee? There's an election next year so forget about the stuff that's really needed -- structural reforms to labour and tax laws, easing business regulations and scrapping inefficient subsidies. The quickest and most effective short-term option may be a dollar bond issued to the Indian diaspora overseas which could boost central bank coffers about $20 billion.

The option was mooted a month ago when the rupee's slide started to get into panic territory but many Indian policymakers are not so keen on the idea

from Global Investing:

Turkey’s central bank — a little more action please

In the selloff gripping emerging markets, one currency is conspicuous by its absence -- the Turkish lira. But this will change unless the central bank adds significantly to its successful lira-defensive measures.

Hopefully at today's policy meeting.

Like India or Indonesia which have borne the brunt of the recent rout, Turkey has a large current account deficit, equating to over 5 percent of its economic output. But what has made the difference for the lira is the contrast between the Turkish central bank's decisive policy tightening moves and the ham-fisted tactics employed by India and Brazil.  (We wrote here about this).  See the following graphic (from Citi) that shows the central bank has effectively raised the effective cost of funding by 200 basis points to around 6.5 percent since its July 23 meeting.

from MacroScope:

India seeks to entice yield-seeking investors in a tapering world

 

India’s concerted effort to shore up the battered rupee over the past two weeks has had one goal in mind: raising currency-adjusted yields to a level where even investors wary of a withdrawal of cheap money from the U.S. would still buy emerging market assets. The central bank has raised overnight money market rates by more than 300 basis points – a spate of tightening not seen since early 2008 – and sharply inverted the swap and the bond yield curve in less than two weeks.

From an offshore perspective, FX implied yields have jumped from a chunky 6 percent last month to well over 8 percent this week. But the risk-reward has not come cheap. For all the pain caused in the world of domestic interest rates, the Indian rupee has barely edged higher. Part of the reason is the Reserve Bank of India’s sledgehammer steps last week have been offset by other actions taken by the central bank and conflicting talk from government officials assuring lenders - the biggest players in the domestic bond markets - that these measures are temporary.

from Global Investing:

BRIC shares? At the right price

Is the price right? Many reckon that the sell off in emerging markets and growing disenchantment with the developing world's growth story is lending fresh validity to the value-based investing model.

That's especially so for the four BRIC economies, where shares have underperformed for years thanks either to an over-reliance on commodities, excessive valuations conferred by a perception of fast growth or simply dodgy corporate governance. Now with MSCI's emerging equity index down 30 percent from 2007 peaks, prices are looking so beaten down that some players, even highly unlikely ones, are finding value.

from Global Investing:

South Africa may need pre-emptive rate strike

Should South Africa's central bank -- the SARB -- strike first with an interest rate hike before being forced into it?  Gill Marcus and her team started their two-day policy meeting today and no doubt have been keeping an eye on happenings in Turkey, a place where a pre-emptive rate hike (instead of blowing billions of dollars in reserves) might have saved the day.

The SARB is very different from Turkey's central bank in that it is generally less concerned about currency weakness due to the competitiveness boost a weak rand gives the domestic mining sector. This time things might be a bit different. The bank is battling not only anaemic growth but also rising inflation that may soon bust the upper end of its 3-6 percent target band thanks to a rand that has weakened 15  percent to the dollar this year.

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