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EM market views to start the year

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Market expectations have swung hastily in recent weeks, with the current narrative signalling a strong goldilocks perspective of growth holding up, inflation under control, and sharp rate cuts by global central banks approaching rapidly. Though there has been a modest retrenchment in the first few days of 2024, we believe that such an outlook sets a low bar to disappointment, especially with so much good news already priced in. A growth surprise is conceivable, but an inflation surprise is also entirely feasible given residual concerns which might lead to another round of re-pricing of monetary policy. The “pivot-on” / “pivot-off” dimension is driving risk appetite, with virtually every major data reading scrutinised. We reiterate our 2023 EM outlook thesis that today’s operating environment warrants a bottom-up approach through the three “S’s” EM selection criteria – “strong” fundamentals, “structural narratives and “sizable” risk premiums (see here).

FX views

EM FX have continued to trade on a softer footing at the start of the new calendar year. Yield spreads have moved against USD over past week as market participants remain confident the Fed will cut rates ahead of other major central banks. Meanwhile, Taiwan election result is not expected to significantly reverse rising geopolitical risks with China. TWD has weakened initially but limited negative spillovers so far to other Asian currencies.

Week in review

Central banks in Poland and Romania left policy rates unchanged, while December headline inflation in Czech Republic, Egypt and Russia eased and came in lower than the previous month’s reading.

Week ahead

December core inflation data for Poland to be released. Israel’s December headline inflation is also set to be reported this week.

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

EM securities attracted around USD29bn in December 2023 – with inflows into equities and bonds at US11.1bn and USD18.0bn, respectively.