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Emerging Markets: Week Ahead Preview

Monday, August 24, 2015 10:10

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(Before It's News)

marctomarket.com / Ilan Solot / August 24, 2015

It is a bitter start of the week for EM. It’s hard to imagine either stabilization or meaningful differentiation in EM until asset prices in major markets find a bottom. Also, the second leg down in commodity prices will keep fundamental pressure elevated for the exporters. Russia, Malaysia, Mexico, South Africa, and Brazil will be the barometers for this. Some have noted the break above the USD/CNY 6.40 level as meaningful, but we don’t read too much into it. The Chinese yuan is doing what officials said it would do: there is more volatility but no large moves. Markets will probably remain in defensive mode for some time. While the price action is starting to look a exaggerated, the risk-reward for betting on a reversal looks better in the DM space than in EM.

Poland releases its unemployment rate on Tuesday, and it is expected to tick lower to 10.1% in July. Recent data has come in on the weaker side, and many are now discussing deflation risks. Last week, PPI contracted by 1.7% and has been in negative territory since late 2012. Retail sales were considerably weaker than expected. Still, the minutes to the last central bank meeting stated that inflation is expected to gradually rise towards the 2.0% target. On Friday, Poland also releases its final Q2 GDP print. The preliminary GDP released in the middle of the month came in at 3.3% y/y, down from 3.6% in Q1. All in all, rates will probably be on hold for some time, but the risk of cut is growing.

South Africa’s Q2 GDP will be released on Tuesday, and is expected to fall to 2.0% y/y and 0.8% q/q. If confirmed, it would continue the gradual – albeit uneven – trend of slowing of the economy. The cycle high for GDP was seen in Q4 of 2010, at 3.4%. The biggest downside risk for the South African economy is the ongoing energy crisis with rolling blackouts. Production of electricity, gas and water are expected to continue declining.