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Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX had an awful week, with virtually every currency down against the dollar. The lone exception was MYR, which managed to end flat on the week. The divergence theme remains supportive for the dollar, and that should keep downward pressure on EM. We may see some corrective bounces from time to time but we remain negative on EM. FOMC meeting and China PMI readings should help set the tone for markets.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

The dollar rally is back on track as the divergence theme re-emerges. DXY traded last week at its highest level since April 2 and is on track to test that day’s cycle high near 97.71. For EM, that has translated into broad-based losses this past week. ARS, RUB, and a handful of other were able to notch small gains last week, but most EM currencies were down against the greenback. COP, BRL, ZAR, and TRY were the worst performers and we see further EM losses ahead.

Turkey Tests Limits of Economic Policy Driven by Election Cycles

The Turkish economy appears to have overcome another perilous stretch of volatility, but in the absence of any structural reforms, and with continued reliance on foreign capital to sustain credit-driven growth, often in synchronisation with the political cycle, long-term prospects will remain hazy at best.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX is coming off a good week, capitalizing on broad-based dollar weakness. Better than expected data out of China helped boost market sentiment too. Key US and China data will come out this week and should help determine the short-term outlook for the dollar.

Argentina: An Economy in Election Mode

Miguel ZIelonka, chartered financial analyst at Econviews, provides some insight into some of the pain points impeding Argentina's economic recovery and measures the government is implementing to mitigate some of those threats.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM got hit hard last week by risk-off sentiment that picked up in the wake of the FOMC meeting. Like the recent ECB decision, markets are rightfully focusing on the global growth implications of the dovish central banks rather than the liquidity implications. The US yield curve briefly inverted last week. If sustained, it would signal a likely US recession in the next 6-24 months. This is hardly conducive to risk and EM assets, which we see remaining under pressure this week.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX ended a good week on a strong note, with virtually every currency up against the greenback. The FOMC is likely to send a very dovish message to the markets this week. While this should help EM gain, we note that risk assets generally did not do well after the January FOMC and March ECB meetings. We think that global growth concerns will become more of an issue in the coming days.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX came under great pressure last week despite the ECB’s dovish hold. Markets instead focused on the grim eurozone economic outlook, which comes within the context of a broader global slowdown. It’s clear that EM needs more than just the liquidity story, though that may be tested too with the spate of US data releases (retail sales, CPI, and PPI) out this week. We remain negative on EM.

Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

Since their post-FOMC peak on January 31, both MSCI EM and MSCI EM FX have fallen. Virtually every EM currency has given up their post-FOMC gains, the lone exception being MYR (+0.2%). The worst performers have been ZAR (-6%), ARS (-3.3%), and TRY (-2.3%). This supports our belief that the liquidity and low US rates story is not enough to sustain the EM rally on its own. What’s still missing is an improved global outlook and we certainly didn’t get that with the US retail sales data.

China: Onshore Bond Index Inclusion Marks Milestone in Financial Liberalisation

The recent announcement that Chinese government bonds (CGBs) and policy bank bonds will be included in the Bloomberg Barclay’s Global Aggregate (Global Agg) Index marks a huge milestone in China’s gradual integration into global markets. Not only does index inclusion herald the beginning of an influx of foreign investment, but it has the potential to mould credit markets across the region.

 

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