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Emerging markets in a holding pattern

Speculation about the policy intentions of President elect Trump continues to dominate financial markets

Investors keenly awaited Trump’s first press conference since winning the election. In fact, this press conference then provided no clarity on the initial priorities of his administration, which in turn meant that weekly moves in key US assets (US dollar, 10-year US Treasuries and the S&P 500) were minor.

We still seem to be in a holding pattern and are awaiting more information at Trump’s inauguration and to see what happens in the following week. We still believe that his initial policy announcements will be US growth friendly, and that upward pressure on the US dollar and US Treasury yields will resume before the end of the month.

Within emerging markets, most attention has focused on Mexico and Turkey. Both countries have experienced extreme currency weakness year to date.

Within emerging markets, most attention has focused on Mexico and Turkey.

Mexico continues to suffer from concerns about the imposition of a US border tax and Trump’s noisy encouragement for US firms to relocate back to the US. Banxicos has already spent US$2bln to try to stabilise the currency, and we remain concerned that the country is vulnerable to further credit and currency concerns. The Mexican policy response will likely be orthodox, but will involve tighter policy in an economy that is already slowing. We expect 1.5% growth in 2017, with 3% twin deficits. This is not an encouraging mix.

Turkey has, in many respects, the opposite problem. In our view the problem is more easily solvable, but the political willingness to do so is much lower. The currency has depreciated 20% against the US dollar since the end of October, but the central bank is reluctant to raise rates because, bluntly, in our view Erdogan does not want them to do so. Over the past week, we have sensed that alarm over the pace and scale of the currency move is beginning to register in Ankara. The long-awaited interest rate hike may be at hand and in our view a 200bps hike is necessary to stabilise markets.

Aside from this, in the absence of a large directional move for the broader market, we have focused our attention over the past week on what we believe to be an opportunity to take advantage of the reopening of the new issuance market. In the week to come, we view the issuance of over US$5bln from Argentina as a likely buying opportunity.

In summary, we have seen a relatively quiet start to the year with a sense that the more decisive risk events will likely occur in the second half of this month.

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News Analysis

David Dowsett

By
David Dowsett
Co-Head of Emerging Market Debt
Published 18 January 2017
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2 minute read
 

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Published January 2017