Rate decisions last week in emerging markets well anticipated this week’s crop of economic data.
Russia for instance not only kept rates on hold last Friday (after raising them at its previous meeting) but struck a less hawkish tone than expected. Voila, data this week showed growth in the third quarter was 2.9 percent compared to 4 percent in April-June.
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.
How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason along with the the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:
Is there a change of sector leadership underway within emerging markets?
For years, commodities and energy delivered world-beating returns to emerging market investors. Yet in recent years there are signs of a shift, says Todd Henry, equity portfolio specialist at T.Rowe Price.
With the China tailwind no longer as strong as before demand for oil and metals will not be as robust as in the past decade, Henry says. But in China as well as elsewhere, disposable incomes have risen as a result of the fast economic growth these countries experienced in the past decade.
A raft of Argentine provinces and municipalities suffered credit rating downgrades this week after one of their number, Chaco, in the north of the country, ran out of hard currency on the eve of a bond payment. Instead it paid creditors $260,000 in pesos. Now Chaco wants creditors to swap $30 million in dollar debt for peso bonds because it still cannot get its hands on any hard currency.
The episode is a frightening reminder of Argentina’s $100 billion debt default 10 years ago and unsurprisingly has triggered a surge in bond yields and credit default swaps (CDS). But broader questions also arise from it.
LONDON, Oct 18 (Reuters) – Kazakhstan plans to sell up to 10
percent of its state grid KEGOC in an initial public offering in
the second quarter of next year and is also considering issuing
international bonds in 2013, senior government officials said on
The KEGOC sale would be one of the first in the
oil-producer’s “People’s IPO” programme. Kazakhstan hopes to
invigorate the small local stock market and raise around $500
million from a first round of IPOs.
The past 24 hours have brought news of more fund launches targeting emerging corporate debt; Barings and HSBC have started a fund each while ING Investment Management said its fund launched late last year had crossed $100 million. We have written about the seemingly insatiable demand for corporate emerging bonds in recent months, with the asset class last month surpassing the $1 trillion mark. Data from Thomson Reuters shows today that a record $263 billion worth of EM corporate debt has already been underwritten this year by banks, more than a fifth higher than was issued in the same 2011 period (see graphic):
The biggest surge has come from Latin America, the data shows, with Brazilian companies accounting for one-fifth of the issuance. A $7 billion bond from Brazil’s state oil firm Petrobras was the second biggest global emerging market bond ever.
The big easing continues. A major surprise today from the Bank of Thailand, which cut interest rates by 25 basis points to 2.75 percent. After repeated indications from Governor Prasarn Trairatvorakul that policy would stay unchanged for now, few had expected the bank to deliver its first rate cut since January. But given the decision was not unanimous, it appears that Prasarn was overruled. As in South Korea last week, the need to boost domestic demand dictated the BoT’s decision. The Thai central bank noted:
The majority of MPC members deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential negative impact from the global economy which remained weak and fragile.
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.
JP Morgan notes that the sovereign CDS of a group of emerging EU members (Bulgaria, Croatia, Hungary, Lithuania, Poland and Romania) have tightened 100 basis points since the start of September, while a basket of emerging peers including Brazil, Indonesia and Turkey saw CDS tighten just 39 bps. See the graphic below:
One would have thought the brewing tensions in neighbouring Iran — an unravelling economy and the likelihood of an air strike by Israel– would only be a source of concern for Turkey. Every cloud, though….
Data released last week shows how the geo-political crisis has helped Turkey to shrink its massive current account deficit by a third this year. That’s because Iranians, scrambling to ditch their crumbling riyal currency and without access to dollars, have been buying up enormous amounts of gold as an inflation hedge, most of it from Turkey.
LONDON (Reuters) – In the seemingly obsessive search for the next bubble in global markets – an understandable if hyper-sensitised reaction to missing the last one – speculative credit remains a prime suspect.
It’s been boom time again this year for what used to be known as “junk bonds”, but which now go by the more polite moniker of high-yield, speculative-grade debt – much of which is corporate borrowing.