20180327-法国巴黎银行-EM_local_rates__Watch_US_corporate_credit_risk_and_the_slope_of_the_US_swap_curve_12页_399kb

EM/LATAM STRATEGY Summary

Core Content

This report provides an analysis of the factors driving variability in Emerging Market (EM) local rates, using Principal Component Analysis (PCA) to identify the main external influences. The analysis is divided into short-term and medium-term approaches, focusing on the relationship between EM rates and US-related variables, as well as commodity prices and financial conditions.

Main Points

• Short-term (35 days): US financial and real economy variables have been the primary drivers of EM local rates. The first principal component (PC) is heavily influenced by US corporate credit risk (BAA 10y spread), the slope of the US swap curve (2s5s), US growth (Atlanta Fed GDP), and the 3m Libor/US OIS spread.
• Medium-term (35 weeks): Commodity prices, US economic surprises, and US corporate credit risk have played an increasingly important role in determining EM rates over the past six months. The first PC now explains most of the variability, while the second and third PCs have also gained relevance for certain countries.
• Country-specific behavior:
  • Brazil: The first PC explains most of the variability.
  • Mexico: The first PC explains the majority of movement, with US economic surprises being a key factor.
  • Colombia: Has been more influenced by idiosyncratic factors, with the third PC playing a significant role.
  • South Africa: The second PC is more important.
  • Turkey: Idiosyncratic factors are key, and it has decoupled from the broader EM trends.
  • Korea and Singapore: Show strong co-variance with US 5y5y real rates.
• Strategic implications:
  • The Fed's tightening cycle is not necessarily detrimental to EM risk if the US curve does not steepen.
  • US corporate credit risk and the slope of the US swap curve (2s5s) are becoming increasingly important for EM/Latam local rate strategies.
  • The analysis suggests that US real interest rates, commodity prices, and economic surprises are key variables to monitor in the medium term.

Key Information

• PCA Methodology: Used to identify the main factors influencing EM local rates.
• Explanatory Power:
  • The first PC explains on average 83.7% of the variability in EM rates in the short term.
  • In the medium term, the first PC explains 86.2% of the variability.
• Selected EM Countries: Brazil, Mexico, Colombia, South Africa, Turkey, Singapore, South Korea, Thailand, and Malaysia are included in the analysis. China and India are excluded due to their high idiosyncratic factors.
• Variables Analyzed:
  • US variables: 3m Libor/US OIS, US swap 2s5s, US 1y1y forward, US economic surprises, US BAA 10y spread, US 5y5y real rate, US 5y breakeven, US dollar broad index, and US economic uncertainty policy.
  • Commodity-related variables: Industrial Metals, Baltic Dry Index, Commodity Index, Crude Oil.
  • Financial conditions: BNP Global Risk, Global Financial Conditions, St Louis Fed Financial Stress Index.

Conclusion

The report concludes that external factors have been more influential in EM local rates than domestic ones, with Turkey being an exception. It recommends a focus on US corporate credit risk, the slope of the US swap curve, and commodity prices for future investment strategies in EM/Latam local rates. The findings are based on daily and weekly data and suggest that EM rates are highly sensitive to changes in US financial conditions and economic trends. The authors also mention the importance of monitoring these variables to construct forward-looking market scenarios.

Strategy Implications

• Short-term strategy: Focus on US corporate credit risk and the slope of the US swap curve (2s5s) for EM/Latam local rate investments.
• Medium-term strategy: Monitor commodity prices, US economic surprises, and US corporate credit risk as key drivers.
• Recommendation: Complement the analysis with other publications such as "How far EM and Latam premium can go?" which links US real interest rates to EM premiums.

Legal Notice

• The report is a marketing communication and not investment research.
• It is intended for professional clients and eligible counterparties under MiFID II.
• The information is based on public sources and may not be accurate or complete.
• BNPP does not offer investment, financial, legal, or tax advice.
• The content may contain "Research" as defined under MiFID II unbundling rules and is subject to specific access conditions.