Emerging Markets Weekly Update

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Includes: BMLA, EWZ, FCA, FXI
by: Artem Perminov

Summary

Two Major Emerging markets Central Banks have eased Monetary Policy this week.

Brazilian government tries to limit public expenditures.

China has shown new signs of slowdown.

Brazil. Brazil's interim president, Michel Temer, proposed on June 15 to limit public spending growth by the inflation rate for up to 20 years. The government is struggling to stop rapid public debt growth. It has grown by 10% of the GDP from 63.3% to 73.7%. In 2015, the largest Latin American economy recorded 10% of GDP government deficit. Brazil 10-year bond yields have shown little reaction to the interim president's statement. By the next day, 16 June, yields reached 12.87%. Bovespa ended the period of 13-16 June gaining 1%. The maximum was 49.752 while the minimum was 48.170. Last year, Brazil was hit by the worst recession in 25 years, according to the IMF. GDP contracted by 3.85% in 2015 amid political crises and corruption scandals. In 2016, GDP is expected to decline by 3.8%.

China. Shanghai Composite index dropped 3.2% at the beginning of the trading day on Monday, ahead of MSCI's decision on whether to include China's mainland stock into its global emerging markets indices. After the uncertainty faded (MSCI hasn't approved China's stocks), China's main continental stock index regained some of its losses and ended the week on 2885.11 after a 2927.16 close on June 8. Yuan has lost 0.36% to the USD during the week. Economic activity data indicates a further slowdown of the world's second largest economy. Fixed asset investments increased by 9.6% in the January-May period, the slowest rate since 2000. Industrial production for May rose 6% from the year earlier, the rate also being at historical lows. Official data from People Bank of China shows further growth in the yuan loans in May 2016 by 14.4% to 100.1 trillion. According to the same data, Supreme People Court of China noted on Wednesday the 52.5% surge in bankruptcy filings year-on-year during the first quarter of 2016.

Russia. The Central Bank of Russia cut key interest rate on June 14 by 0.5% to 10.5% as yearly prices growth rates have slowed down to 7.3% in June 2016. Ruble exchange rate fluctuated around 65 RUB/USD during the week from 14 to 17 June, ending with a moderate appreciation by 0.1% to 65.54 RUB/USD. MICEX Index, the main Russia stock indicator, started the week with 0.9% drop to 1885.92 and continued declining in the following weeks, having lost 0.8% from June 14 closing to June 16 close.

Indonesia. On Thursday, the Central Bank of Indonesia cut interest rates for the third time this year by 0.25% to 6.5%. Rates have been held at 6.75% from March 2016. The decision was made amid slowing inflation and exports hit by falling commodities prices.

What to watch next week? On 21 June, The Central Bank of Turkey will make its policy decision. Current Overnight Lending Rate is set at 9.5%. Over the last three months, the Central Bank has cut rates by a total 125 basis points. Inflation is still above the Central Bank's target of 5%, while last month it was 6.58%. On the same day, Brazil YoY inflation data will be released. A week ago, on June 8, the Central Bank of Brazil left the Selic rate unchanged at 14.25%.

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