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Emerging Markets Week Ahead Summary (19 October 2018)

Core Content

This report provides an overview of key events and market outlook for emerging markets (EM) in the week ahead, with a focus on Brazil, Mexico, Argentina, Colombia, and other regions. It includes economic data releases, central bank actions, and trade ideas, along with recent model updates and forecasts.

Main Countries Overview

Brazil

• Election: The last week before the runoff presidential election on 28 October. Jair Bolsonaro (PSL) is leading with 58% of valid votes, a more market-friendly scenario.
• Inflation: Mid-month inflation (IPCA-15) is expected to rise to 0.64% in October from 0.52% in September. Annual inflation is now around the central bank's target of 4.50%.
• Election Tracker: Detailed analysis and updates on the election will be available.

Mexico

• Inflation: The H1 inflation print on 24 October could influence the November policy rate decision. Core inflation is forecast to decelerate to 3.6% y/y, while headline inflation is expected at 4.9% y/y.
• Policy Outlook: The central bank is likely to hold rates in November due to the core inflation deceleration, despite potential upside pressure from oil prices.
• Key Dates: Public consultation on the Mexico City airport and the 2019 budget are expected to be significant.

Argentina

• Trade Balance: The September trade balance report is a key highlight, with a forecast of a USD0.2bn surplus, the first since December 2016.
• GDP Proxy: August GDP is expected to show a 3% y/y contraction, and economic activity is likely to continue contracting in Q4 2018.
• IMF Review: The IMF will conduct its initial review of Argentina's agreement on 26 October, with the approval of the revised September agreement expected.

Colombia

• Tax Reform: Discussions on tax reform will dominate market attention, with the government likely to send a draft bill to Congress in the next two weeks.
• Central Bank: The central bank is expected to keep rates on hold, reflecting confidence in its slightly expansionary stance and low inflation environment.
• Fiscal Outlook: A narrow tax base and aging population pose long-term fiscal challenges, but a rating downgrade is not expected.

Key Market Views

Turkey

• Rate Decision: The Central Bank of Turkey is expected to keep rates on hold on 25 October, following a 625bp hike in September.
• FX Impact: The recent appreciation of the lira is likely to influence the decision.

South Africa

• Inflation: September CPI inflation is expected to moderate to 4.8% y/y from 4.9% in August.
• MTBPS: The medium-term budget policy statement on 24 October is unlikely to bring surprises, with the main budget deficit to GDP expected to rise slightly to 4.2%.
• CDS Strategy: The team is maintaining a long 5y CDS in relative value with other countries.
• FX Volatility: The USDZAR volatility surface is the most inverted in EM, making front-end calendars attractive.

Trade Ideas

Interest Rates

• TR-8228: Pay Brazil Cupom Cambial Nov 18s, Jul 19s FRA. +23 bp P/L, 237 USD.
• TR-7752: Receive Colombia IBR 2Y. +5 bp P/L, 218 USD.
• TR-7583: Receive Chile CLPxCAM 18M. +40 bp P/L, -63 USD.
• TR-7028: Receive Mexico TIE 1Y1Y. -69 bp P/L, -2220 USD.
• TR-6998: Receive Brazil DI Jan20sJan21s FRA. +57 bp P/L, 856 USD.
• TR-8239: Sell Turkey 5Y CDS. +30.3 bp P/L, 342 USD.
• TR-7856: Buy Argentina 5Y CDS vs Sell 5Y Brazil/Mexico/Colombia CDS. +167.8 bp P/L, 547 USD.
• TR-7552: Long Peru Soberanos 2026s. -11.9 bp P/L, -58 EUR.
• TR-7476: Sell Brazil 5Y CDS. +67.2 bp P/L, 291 USD.
• TR-8000: Buy 10y China Government Bonds. +7 bp P/L, 70 USD.

FX

• TR-8256: Short USDZAR via 3m Fwd. -1.23% P/L, 4.38% profit.
• TR-8215: Short USDARS via 1m NDF. -4.67% P/L.
• TR-8159: Short USDTRY via 3m Fwd. -5% P/L.
• TR-8211: Short USDIDR via 3m Fwd. -1.23% P/L.

Hedging Structures

• TR-8102: Buy 1x 1m put@70.5, sell 1x1 call spread @ 73.5 vs 74. -0.10% P/L.

Economic Calendar Highlights

Central Bank Watch

• China: 1y bank lending rate at 4.35%, no change expected in Q4 2018. Policy measures to stabilize growth and support financial stability.
• India: Overnight repo rate at 6.50%, expected to rise by 25bp in December. Inflation is forecast to rise to the top end of the 2-6% target.
• Indonesia: Expected to hike rates by 25bp on 23 October due to IDR weakness. Bank Indonesia will reiterate its "front-loaded" stance.
• South Africa: No major surprises expected in the MTBPS. The main budget deficit to GDP may rise by 0.4pp to 4.2%.
• Turkey: Expected to keep rates on hold, influenced by lira appreciation and inflation dynamics.

Recent Model Updates

• A structural analysis of how risk appetite affects EM yields. The financial channel (US interest rates) remains more influential than the commercial channel (China).
• The use of Spearman rank correlation to measure risk appetite, avoiding issues with Pearson's linear correlation.
• EM yields are structurally bullish due to the likely decline in US real interest rates.

Summary of Key Themes

• Election Impact: Brazil's runoff election is a major focus, with Bolsonaro leading in polls.
• Inflation Trends: EM inflation remains a key driver, with some countries like Mexico and Argentina showing mixed signals.
• Central Bank Policies: Central banks are closely monitoring inflation and economic data, with some expected to hold rates.
• FX Volatility: USDZAR is the most inverted EMFX vol surface, making front-end strategies attractive.
• Trade Ideas: A mix of rate and FX trades are in place, with some showing positive P/L and others in the process of closing.

Team Details & Legal Notice

• The report is prepared by BNP Paribas Market Call.
• Important information and MAR disclosures are available at the end of the report.
• Legal notice and disclaimer apply, as detailed in the document.