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Summertime unwind?

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

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@uk.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

 

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

Macro focus

Notwithstanding supportive fundamentals and burgeoning rate cuts across the EM complex, a more open US election is an ongoing source of EM uncertainty, that is likely to keep the summer period more than volatile than usual. As we move deeper into H2 2024, even a favourable macro markets outlook is likely to increasingly take a back-seat to the US elections – which may or may not re-set the policy landscape in a way that is unfriendly to EM assets. The risk is that a delay in Fed cuts has not just postponed a better period for EM asset performance and fund flows, but extinguished it altogether as the US election outcome leads to a new bout of US asset and US dollar strength. However, it is important to recall that in the first Trump administration, tariffs only transpired markedly in the second half of the term, and that the first year (2017) was relatively strong for the EM complex. In this context, there is only a limited degree of policy predictability and so it will be important to be nimble and respond to policies as they materialise, with the only clear conviction being higher volatility.

FX views

Last week featured volatile market conditions in the midst of negative reactions to tech earnings and the unwind of a number of macro trades. As the dust clears on a turbulent week, the safe havens – JPY, CHF and USD – were the top performers in G10. From an EM perspective, despite the recent challenges to EM carry, year-to-date total returns for an EM vs G9 FX basket have been inching higher through most of 2024, as in previous years. After a significant decline in FX carry through 2023, this has stabilised so far in 2024 as EM central banks have adopted a more cautious stance to easing policy, partly on the back of external pressures. With EM FX cheapness on a trade-weighted basis now mostly eroded, and broad US dollar strength, it will still be important to lean on carry for EM FX total returns even if that is likely to prove a harder climb given the sensitivities to trade tensions wrought by upcoming US elections.

Week in review

The National Bank of Hungary (MNB) cut its base rate by 25bp to 6.75%, in line with our forecast (as well as consensus) expectations. Inflation in South Africa edged lower from 5.2% y/y in May to 5.1% y/y in June, higher than our forecasts (4.9% y/y), but in line with consensus. The Central Bank of Turkey (CBRT) kept its policy rate at 50.00% in line with our (and consensus) expectations. The Central Bank of Russia (CBR) raised its key rate at to 18.00% from 16.00%, in line with our (and consensus) expectations. Finally, after the hike in late March, petrol and diesel prices were hiked again in Egypt, ahead of the IMF meeting on 29 July.

Week ahead

This week, there will be an MPC meeting in the Czech Republic (MUFG and consensus: -25bps to 4.50%. July inflation data will be released in Poland (MUFG: 4.4% y/y; consensus: 4.5% y/y) and the Q2 2024 flash GDP print will be released in Hungary (MUFG: 2.3% y/y; consensus: 2.1% y/y). Finally, PMIs will be released across the EM EMEA region starting on 1 August.

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.

Core indicators

The latest weekly IIF flow data signalled that EM securities attracted USD0.2bn in the week ending 26 July. The breakdown suggests that equities (USD-0.4bn) were offset by debt (USD0.2bn) over the week.