All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.
JP Morgan has an interesting take on the stupendous recent rally in the credit default swaps (CDS) of countries such as Poland and Hungary which are considered emerging markets, yet are members of the European Union. Analysts at the bank link the moves to the EU’s upcoming ban on “naked” sovereign CDS trades — trade in CDS by investors who don’t have ownership of the underlying government debt. The ban which comes into effect on Nov. 1, was brought in during 2010 after EU politicians alleged that hedge funds short-selling Greek CDS had exacerbated the crisis.
When Poland stunned markets in May with a quarter-point rate rise, analysts at Capital Economics predicted that the central bank would have an “ECB moment” before the year was over, a reference to the European Central Bank’s decision to cut interest rates last year, just months after it hiked them. A slew of weak economic data, from industrial output to retail sales and employment, indicates the ECB moment could arrive sooner than expected. PMI readings today shows the manufacturing business climate deteriorated for the fourth straight month, remaining in contraction territory.
It’s turning out to be a great year for emerging debt. Returns on sovereign dollar bonds have topped 10 percent already this year on the benchmark EMBI Global index, compiled by JP Morgan. That’s better than any other fixed income or equity category, whether in emerging or developed markets. Total 2012 returns could be as much as 12 percent, JPM reckons.
What’s the damage from being a member of the euro? German credit default swaps, used to insure risk, have spiralled to record highs over 130 basis points, three times the level of a year ago amid the escalating brouhaha over Spain’s banks and Greek elections. U.S. CDS meanwhile remain around 45 bps. That means it costs 45,000 to insure $10 million worth of U.S. investments for five years, compared to $135,000 for Germany. (click the graphics to enlarge)
Emerging market bonds denominated in local currencies enjoyed a record January last month with JP Morgan’s GBI-EM Global index returning around 8 percent in dollar terms. Year-to-date, returns are over 9.5 percent.
Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.
“Will no one rid me of this turbulent central banker?” Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once. Increasingly, the spat between Orban’s government and central bank governor Andras Simor brings to memory the quarrel England’s Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus. The government’s efforts to sideline Simor are viewed as infringing on the central bank’s independence.