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EM STRATEGY DAILY - 27 February 2018 Summary

Core Content

This document provides an overview of the emerging markets (EM) strategy and market outlook for the day, focusing on key developments in Central and Eastern Europe (CEEMEA), Latin America (Latam), and Asia. It also includes details on the production team, legal notices, and relevant disclosures.

Key Market Developments

South Africa

• Cabinet Reshuffle: President Cyril Ramaphosa announced a cabinet reshuffle, reinstating Nhlanhla Nene as Finance Minister and appointing Pravin Gordhan as Public Enterprises Minister.
• Sentiment Impact: The changes are expected to be positive for sentiment, especially for local investors who have been historically underweight in South African assets.
• Rate Recommendation: The team recommends receiving 2y2y rates, targeting 7.00%, with a positive carry/roll-down of 11bp per 3 months.

Hungary

• Monetary Policy Meeting: The Hungarian National Bank (MNB) will hold its monetary policy meeting.
• Base Rate: The MNB has kept the base rate at 0.9% since 2016.
• Policy Outlook: No rate change is expected as inflation remains within the lower tolerance level. The MNB maintains a dovish stance and aims to prevent nominal HUF appreciation.
• IRS Tender: Another IRS tender is scheduled for Thursday (1 March).

Latin America (Latam)

• Brazil: The DI market continues to flatten, following recent changes to Brazilian pension fund investment rules.
• Term Premium Model: The team believes the changes should be complemented with the Brazilian term premium model, indicating potential for further flattening.
• Rate Recommendation: Receiving rates in the belly (FRA Jan-20/Jan-21) with an original target of 9.75% and an allocation of USD 50,000 DV01.
• Argentina: The Central Bank of Argentina (BCRA) is expected to keep rates unchanged. Inflation moderation is not evident, and no official CPI data or new inflation expectations have been released.
• CDS Recommendation: The team reaffirms the view to buy protection in Argentina 5y CDS against a basket of Latam 5y CDS (Brazil, Colombia, and Mexico) due to the narrow margin for setbacks in the region.

Asia

• South Korea: The Bank of Korea (BoK) left rates unchanged as expected, with little change in the policy statement.
• Inflation Outlook: Headline CPI slowed to 1.0% in Q4, suggesting further tightening will be gradual.
• Rate Hike Expectation: Only one more rate hike is expected this year, with August as the earliest possibility.
• FX Positioning: The Asia FX positioning indicator shows a net flat overhang, with long positions in Asian currencies unwound. Some long positions in SGD, THB, and TWD remain, while KRW, INR, IDR, and PHP are either flat or short.

Key Contacts

Legal and Regulatory Information

• Non-Independent Research: This document is non-independent research for UK FCA rules and is a marketing communication under MiFID II.
• Conflicts of Interest: The research may be subject to conflicts of interest due to interactions with sales and trading.
• Disclaimer: The information is based on public sources and not independently verified. BNPP does not accept responsibility for the accuracy or completeness of the information.
• No Investment Advice: The document does not provide investment, financial, legal, or tax advice.
• Performance Data: Performance data may include back-testing and is not indicative of future results.
• Confidentiality: The information is provided on a confidential basis and may not be copied or distributed without prior consent.

US Disclosures

• Options: Options are complex and not suitable for all investors. They may involve a high degree of risk.
• ETFs: ETFs have risks including tracking error, currency, and geopolitical risks.
• Convertibles and Unregistered Securities: Some securities may not be registered under US laws and are considered "restricted securities".
• Distribution Restrictions: The report may only be distributed to certain qualified investors in the US.

UK and EU Disclosures

• UK Communication: The document is communicated by BNP Paribas London Branch.
• France and Germany: The report is distributed by BNPP S.A. and BNPP Niederlassung Deutschland, subject to ECB and national regulatory oversight.
• Belgium and Ireland: The report is authorized and supervised by relevant authorities in Belgium and Ireland.

Online Resources

• BNP Paribas Global Markets Website: www.globalmarkets.bnpparibas.com
• Bloomberg:
  • Fixed Income Research: BPFR
  • G10 Interest Rate Research: BPBS
  • Emerging Markets Research: BPFR
  • Market Economics: BPEC