Emerging Markets: What Has Changed

1) There was a pickup in intervention rhetoric from the Bank of Korea (BOK)
2) Colombian Finance Minister Cardenas tweeted (yes, tweeted) that the government will restart its dollar buying program
3) The Chinese government announced new measures to support the housing market
4) The political situation in Thailand is deteriorating further with violence escalating
5) In Turkey, the tragic mining incident is breathing life to anti-government sentiment
6) Anti-China protests in Vietnam are also escalating

Over the last week, India (+7.0%), Egypt (+4.2%), and Hong Kong (+4.1) have outperformed in the EM equity space in local currency terms, while Peru (-0.6%) and Taiwan (-0.6%) have underperformed.

In the EM local currency bond space, Hungary 10-year yield (-39 bp), Poland (-16 bp), and Czech Republic (-16 bp) have outperformed over the last week, while Turkey 10-year yield (+19 bp), Ukraine (+18 bp), and India (+3 bp) have underperformed. To put this in better context, the (NYSE:10 year UST) yield was down 11 bp over the past week.

In the EM FX space, INR (+1.3% vs. USD), PHP (+1.2), and IDR (+1.0%) and have outperformed over the last week, while COP (-1.2%), EGP (-1.1%), and RY (-0.6%) have underperformed.

1) There was a pickup in intervention rhetoric from the Bank of Korea (BOK). The central bank was due for change in tone after the strong performance of KRW over the last several months. The won is the only Asian currency with a net positive return (+8.5%) since the tapering-inspired stress in EM started in mid-May 2013. As the USD/KRW pair trended closer to the key psychological level of 1000, it seems as if policymakers’ patience has reached its limit. We also note that the JPY/KRW was threatening to break below the key 10 level this week. Backing up unconfirmed chatter of intervention, BOK officials began verbal intervention, speaking about helping exporters and warning they are ready to act against herd behaviour in FX.

2) Colombian Finance Minister Cardenas tweeted (yes, tweeted) that the government will restart its dollar buying program. No further details were given, but this is in addition to the regular intervention already being undertaken by the central bank. While the distinction may be a bit too fine for most observers, it simply underscores that policymakers remain very concerned about peso strength. Cardenas believes that a “competitive” exchange rate is a priority, and President Santos said this week that the “ideal” exchange rate would be between 2000-2200. But what did officials expect would happen to the peso when the central bank surprised the markets with a 25 bp hike to start the tightening cycle last month?

3) The Chinese government announced new measures to support the housing market. This has led some observers to infer that this is becoming a real concern. The most recent action by the People's Bank of China (PBOC) was to direct banks to keep up mortgage lending, especially for first mortgages. More measures are probably forthcoming, along with a larger, yet selective counter-cyclical response to the slowdown by authorities. This has been supporting housing-related stocks through the bad data. April sales were down 7.7% and housing starts were down 25% year-on-year (y/y). Also note that recent lending data showed a faster pace of M2 growth (13.2%) and slightly higher-than-expected April aggregate financing numbers (though well below March’s print).

4) The political situation in Thailand is deteriorating further with violence escalating. Three anti-government protesters were killed and 20 injured yesterday. In reaction, protestors disrupted a meeting between the government and the Election Commission as they try to organize a new election for July. We are still somewhat surprised by the relatively muted performance of the Thai baht. Although we appreciate Thailand’s relatively solid fundamentals, we prefer to stay on the sidelines in the run up to the June elections.

5) Meanwhile in Turkey, the tragic death of (so far confirmed) 282 miners is breathing life to anti-government sentiment. Unions are calling for a one-day strike and violence is breaking out on the streets. The government’s reaction is not helping in the least. In particular, news wires and social media are focusing on images of an advisor to PM Erdogan seen kicking one of the mourners several times as security forces held him down. In addition, Erdogan has also been criticized about his most recent speech on the topic, in which he compared the disaster with mining accidents that happened in the nineteenth century. We doubt the situation will lead to any short-term developments beyond what we are already seeing, and are unlikely to spark protests of the magnitude of those seen last year.

6) Anti-China protests in Vietnam are also escalating. About 10 factories have already been attacked and looted in the south of the country, though many of these were Taiwanese and Korean-owned. About 100 Chinese people have been hospitalized. These (highly unusual) scenes of public demonstration were triggered by escalating geopolitical tensions relating to South China Sea when China announced it was drilling for oil in contested waters.