Recap on the past week
Emerging markets (EM) have continued their strong run since the start of 2018. This is despite the reflation theme in advanced economies gaining more traction (though we think the hype is too strong), which in theory should be negative for emerging markets given the possible more hawkish line by the central bank in the developed world. However, the combination of a weaker USD, higher oil prices and generally strong global economic momentum is outweighing concerns so far of tighter monetary policies. With the higher oil prices, it is no surprise that oil-exporter currencies did well, with COP, RUB, MYR and IDR booking sizeable gains against the USD. The Eastern European currencies also saw good momentum, mainly as they are closely linked to the EUR (though they also strengthened against the euro). Even the MXN shrugged off the news that Trump is contemplating leaving NAFTA.
With a strong economic cycle, high optimism, strong earnings and subdued inflation, it is natural to question what could possibly go wrong. US president Trump seems to be shifting his attention to trade issues after passing the US tax reform. Both protectionist measures against China and possibly pulling out of NAFTA are on the cards. While China has officially denied the story, there are concerns that China could reduce its holding of US treasuries. A deterioration in the relations between the world's two biggest economies would clearly be negative for global risk sentiment and hence the EM world.
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