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from Global Investing:
Emerging markets’ export problem
Taiwan's forecast-beating export data today came as a pleasant surprise amid the general emerging markets economic gloom. In a raft of developing countries, from South Korea to Brazil, from Malaysia to the Czech Republic, export data has disappointed. HSBC's monthly PMI index showed this month that recovery remains subdued.
With Europe still in the doldrums, this is not totally unsurprising. But economists are growing increasingly concerned because the lack of export growth coindides with a nascent U.S. recovery. Clearly EM is failing to ride the US coattails.
Does all this confirm the gloomy prediction made last month by Morgan Stanley's chief emerging markets economist, Manoj Pradhan. Pradhan reckons that a U.S. economy in recovery would be a competitor rather than a client for emerging markets, as the world's biggest economy tries to reinvent itself as a manufacturing power and shifts away from consumption-led growth. It is the latter that helped underwrite the export-led emerging market boom of the past decade.
It's early days yet. Yet the impact of the U.S. rebound this time does appear different from the past.
from Global Investing:
Emerging earnings: a lot of misses
It's not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and steep falls in return-on-equity (ROE). The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.
The analysts found that:
--With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.
from Global Investing:
Cyprus: don’t line up the dominoes
By Stephen Eisenhammer
Over the past few years we've become used to the global economy resting on a knife-edge. So when dramatic events like the levy on bank deposits in Cyprus happen we wait for the dominoes to fall. Two days on we're still waiting...
The recovery in the euro zone, so vital to Europe's emerging markets, is undoubtedly fragile but the incident in Cyprus doesn't seem to be enough to knock it all down now that the European Central Bank seems willing to step in if borrowing rates go to high.
from Global Investing:
Emerging Policy-”Full stop” in Poland but a start in Mexico?
An action-packed week for emerging monetary policy.
First we had Poland stunning markets with a half-point rate cut when only 25 bps was priced. Governor Marek Belka said the double-cut marked a "full stop" after several cuts. Then came Brazil which kept rates on hold at 7.25 but turned hawkish after spending over 18 months in dovish mode. (Rates stayed on hold in Indonesia and Malaysia).
In Brazil, it was high time. Inflation and inflation expectations have been rising for a while, the yield curve has been steepening and anxiety has grown, not only about the central bank"s commitment to controlling inflation but also about its independence. Whether the central bank will actually start a hiking cycle anytime soon is another matter. Barclays reckon it will, predicting three consecutive 50 bps rate hikes starting from April. But analysts at Societe Generale are among those who are betting on flat rates for now. They point out that since the meeting, the Brazilian yield curve has moved to its flattest in a year and the 2017 inflation breakevens (the difference between the yields on fixed-rate and inflation-linked bonds of similar maturity) have fallen more than 50bps:
from Global Investing:
Time running out for Hungarian bonds?
Could Hungary's run of good luck be about to end?
Despite controversial policies, things have gone the country's way in recent months -- the easing euro crisis and abundant global liquidity saw investors flock to high-yield emerging markets such as Hungary and also allowed it to tap international capital for a $3.25 billion bond. It has slashed interest rates seven times straight, cutting them this week to a record low 5.25 percent. The result is an increased reliance on international bond investors. Foreigners' share of the Budapest bond market is almost 50 percent, among the highest percentages in emerging markets.
But analysts at Unicredit write that both markets and economic data had validated rate cuts in 2012, which may not be the case any more. Annual headline inflation fell from 6.6% in September 2012 to 3.7% in January 2013 while the economy contracted 1.7% last year. As a result, net foreign buying of Hungarian bonds rose in the second half of 2012 to 837 billion forints (an average daily rate of almost 6 billion forints), they note. Markets are pricing at least 3 more cuts, that will take the rate to 4.5 percent.
from Global Investing:
Emerging Policy-More cuts and a change of governors in Hungary
All eyes on the Hungarian central bank this week. Not so much on tomorrow's policy meeting (a 25 bps rate cut is almost a foregone conclusion) but on Friday's nomination of a new governor by Prime Minister Viktor Orban. Expectations are for Economy Minister Gyorgy Matolcsy to get the job, paving the way for an extended easing cycle. Swaps markets are currently pricing some 100 basis points of rate cuts over the coming six months in Hungary -- the question is, could this go further? With tomorrow's meeting to be the last by incumbent Andras Simor, clues over future policy are unlikely, but analysts canvassed by Reuters reckon interest rates could fall to 4.5 percent by the third quarter, compared to their prediction for a 5 percent trough in last month's poll.
A rate cut is also possible in Israel later today, taking the interest rate to 1.5 percent. Recent data showed growth at a weaker-than-expected 2.5 percent in the last quarter of 2012 while inflation was 1.5 percent in January, at the bottom of the central bank's target range. But most importantly, according to Goldman Sachs, the shekel has been strengthening, having risen 7 percent against the dollar since November and 6.8 percent on a trade-weighted basis in this period. That could prompt a rate cut, though analysts polled by Reuters still think on balance that the BOI will keep rates unchanged while retaining a dovish bias. A possible reason could be that house prices -- a sensitive issue in Israel -- are still on the rise despite tougher regulations on mortgage lending.
from Global Investing:
No Czech intervention but watch the crown
The Czech central bank surprised many this week after its policy meeting. Widely expected to announce the timing and extent of FX market interventions, Governor Miroslav Singer not only failed to do so, he effectively signalled that intervention was no longer on the cards -- at least in the short term In his words, looser monetary conditions were now “less urgent”.
What changed Singer's mind? After all, data just hours earlier showed Czech industrial production plunging 12 percent year-on-year in December. The economy has not grown since mid-2011 and is likely to have contracted by more than 1 percent last year. Singer in fact predicts a second full year of recession. But some slightly upbeat-looking forward indicators could be cause for cheer. According to William Jackson at Capital Economics:
from Global Investing:
Emerging Policy-Doves reign
Rate cuts are still coming thick and fast in emerging markets -- in some cases because of falling inflation and in others to deter the gush of speculative international capital.
Arguably the biggest event in emerging markets is tomorrow's Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.
from Global Investing:
Emerging policy-One cut, two steady
What a varied bunch emerging markets have become. At last week's monetary policy meetings, we saw one rate rise (Serbia) and differing messages from the rest. Mexico turned dovish while hitherto dovish Brazilian central bank finally mentioned the inflation problem. Russia meanwhile kept markets guessing, signalling it could either raise rates next month or cut them.
This week, a cut looks likely in Turkey while South Africa and the Philippines will almost certainly keep interest rates steady.
from Global Investing:
The Watanabes are coming
With Shinzo Abe's new government intent on prodding the Bank of Japan into unlimited monetary easing, it is hardly surprising that the yen has slumped to two-year lows against the dollar. This could lead to even more flows into overseas markets from Japanese investors seeking higher-yield homes for their money.
Japanese mom-and-pop investors -- known collectively as Mrs Watanabe - have for years been canny players of currency and interest rate arbitrage. In recent years they have stepped away from old favourites, New Zealand and Australia, in favour of emerging markets such as Brazil, South Africa and Turkey. (See here to read Global Investing's take on Mrs Watanabe's foray into Turkey). Flows from Japan stalled somewhat in the wake of the 2010 earthquake but EM-dedicated Japanese investment trusts, known as toshin, remain a mighty force, with estimated assets of over $64 billion. Analysts at JP Morgan noted back in October that with the U.S. Fed's QE3 in full swing, more Japanese cash had started to flow out.
