Frontera News https://fronteranews.com Frontier Markets News Mon, 16 Jan 2017 18:32:35 +0000 en-US hourly 1 Bill Gross: Bear Bond Market Triggered If 10-Year Treasury Yield Hits This Level https://fronteranews.com/investing/why-is-the-2-6-10-year-treasury-yield-level-critical-to-bill-gross/ Mon, 16 Jan 2017 16:34:19 +0000 https://fronteranews.com/?p=17076 This is post 2 of 2 in the series “Bill Gross Shares Perspective on Risk Markets; Predicts a Bear Bond Market” Divergent monetary policies At its December 2016 FOMC meeting, the US Federal Reserve raised interest rates by 0.25%, bringing the range of the federal funds rate up to 0.50% to 0.75%.  The US economy […]

The post Bill Gross: Bear Bond Market Triggered If 10-Year Treasury Yield Hits This Level appeared first on Frontera News.

]]>

This is post 2 of 2 in the series “Bill Gross Shares Perspective on Risk Markets; Predicts a Bear Bond Market”

Divergent monetary policies

At its December 2016 FOMC meeting, the US Federal Reserve raised interest rates by 0.25%, bringing the range of the federal funds rate up to 0.50% to 0.75%.  The US economy (IWM) (SPY) has clearly begun its tighten its monetary policy with more rate hikes coming during the course of the year. This has led the 10-year US Treasury yields to soar. From a 1.8% in November 2016, the 10-year US Treasury bond (TLT) (IEF) now yields around 2.4%.

On the other hand, yields on the Japanese 10-year government bonds of JGBs stand pinned at near 0%, while the doves continue to fly over Europe (VGK). With inflation and growth still low, we’ve seen the ECB president Mario Draghi extending the quantitative easing program in place.

Global arbitrage may cap the 10-year treasury yield at 2.4% to 2.6%, says Bill Gross

Hence, for the US, “global arbitrage effectively caps the 10-year at 2.4% to 2.6% levels,” noted Bill Gross in his January 2017 Investment Outlook. For the first year that Donald Trump is in office, Gross does see the 10-year Treasury move higher driven by an unclear fundamental perspective. In the later years, however, the influence of technical indicators would become stronger as a strong 3-decade long downward trendline sported by the 10-year Treasury would increasingly be at the risk of being broken.

For 2017, Gross finds the 2.6% yield level as critical for the 10-year Treasury, a breach of which could result in a “secular bear bond market.”

The post Bill Gross: Bear Bond Market Triggered If 10-Year Treasury Yield Hits This Level appeared first on Frontera News.

]]>
Declining Inflation in India Is Giving Elbow Room to Its Central Bank https://fronteranews.com/investing/declining-inflation-india-giving-elbow-room-central-bank/ Mon, 16 Jan 2017 14:28:14 +0000 https://fronteranews.com/?p=17055 This is post 3 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors” Inflation continues to decline Inflation at the retail level in India, measured by the CPI (consumer price index), declined to a 25 month low in December 2016 as prices rose just 3.4% year-on-year. One would have to look back […]

The post Declining Inflation in India Is Giving Elbow Room to Its Central Bank appeared first on Frontera News.

]]>

This is post 3 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors”

Inflation continues to decline

Inflation at the retail level in India, measured by the CPI (consumer price index), declined to a 25 month low in December 2016 as prices rose just 3.4% year-on-year. One would have to look back to November 2014 in order to find a slower pace of inflation in recent years.

Food prices, measured by the CFPI (consumer food price index), which form 47.25% of the overall CPI, rose by just 1.4% in December and were the primary reason for the decelerating pace of inflation in India. The pace of CFPI was also the lowest in 25 months.

Impact on monetary policy

The RBI (Reserve Bank of India), the country’s central bank, has targeted to keep inflation below the 5% mark until March 2017. With inflation remaining below that target for the past four months and its pace declining for the past five months, the central bank has some room to cut interest rates. This cut will also help alleviate some pressure on the economy due to the demonetization which had significantly pulled down consumer spending.

The central bank is scheduled to meet on February 8 to decide on the course of monetary policy, and may cut rates without worrying too much about a surge in inflation.

Overall assessment

We’ve looked at three economic indicators of India in this series: industrial production, trade balance, and inflation. A positive reading on all three indicators has given investors in India something to cheer about.

However, there are some factors which investors need to be wary of for 2017. One of them is the rise in crude oil prices. India is a net importer of the commodity and a rise in prices puts pressure on inflation. This may lead to the RBI being hesitant in cutting rates by a substantial amount.

Another is the impact of President-elect Donald Trump’s policies on India’s exports to the US as well as overall trade relations.

However, internal conditions in India remain robust enough to attract foreign investor interest (EPI). Though the impact of demonetization will reflect on industrial production and the overall economy for a few months, it is not expected to have a protracted impact on economic activity in the country.

The post Declining Inflation in India Is Giving Elbow Room to Its Central Bank appeared first on Frontera News.

]]>
India’s Loses Ground With Largest Trading Partner, Fears Possible Restrictions From US https://fronteranews.com/investing/indias-trade-deficit-falls-trade-china/ Mon, 16 Jan 2017 14:17:34 +0000 https://fronteranews.com/?p=17051 This is post 2 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors” Trade deficit declines in December India’s trade deficit declined in December, which should please investors in the country (INDA). Even in the face of demonetization, the indicator, along with industrial production, is a positive surprise. A decline in the […]

The post India’s Loses Ground With Largest Trading Partner, Fears Possible Restrictions From US appeared first on Frontera News.

]]>

This is post 2 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors”

Trade deficit declines in December

India’s trade deficit declined in December, which should please investors in the country (INDA). Even in the face of demonetization, the indicator, along with industrial production, is a positive surprise.

A decline in the trade deficit is beneficial to overall economic output as it reduces the drag of higher imports as compared to exports. This can be supportive at a time when demonetization is expected to have a dampening impact on economic activity.

India’s exports rose 5.7% in December while imports rose only 0.5%, thus leading to a decline in trade deficit. From April to December 2016, cumulative exports stood at $198.8 billion, up 0.75% from the corresponding period last year. In the same period, cumulative imports contracted by 7.4%.

The decline in India’s trade deficit in December had more to do with depressed imports than increasing exports. A 48.5% nose dive in gold imports was mainly responsible for the marginal rise in imports. Excluding gold, silver and crude oil, imports registered a 6.1% rise year-on-year.

Trade with China declines

China (MCHI) surpassed the United States to become India’s largest trade partner in 2008, and has maintained this position since. However, Beijing’s import cutting spree has taken a toll on bilateral trade.

According to data collected by PTI (Press Trust of India) from GAC (General Administration of Customs), China showed that trade between the two nations in 2016 declined by 2.1% to $70.8 billion. India’s exports to China were estimated to be $11.8 billion in 2016, down 12% from a year ago. At the same time, China’s exports to India nudged up by 0.2% to $58.3 billion. This led to India’s trade deficit with China increasing to $46.5 billion.

Going forward

Apart from declining exports to China, India has to worry about possible trade restrictions from the US as well.

During his presidential campaign, Donald Trump expressed a desire to bring jobs back to the US and renegotiate trade deals which are not in favor of the country, mentioning China and India in various speeches. If Trump follows through on his promise, India’s IT (information technology) sector may be in for a rough ride in the coming years.

India’s flagship IT companies like Infosys (INFY) and Wipro (WIT) derive a large portion of their business via outsourced projects from US companies, with these activities forming over half of their total revenue.

The steady improvement in the US economy would be beneficial to India only if merchandise and services trade with the US does not come under the ambit of tax levies or sanctions. If not, India’s exports may come under pressure in 2017 given the sluggishness in other parts of the world including Europe and Japan which are large trading partners of India.

The post India’s Loses Ground With Largest Trading Partner, Fears Possible Restrictions From US appeared first on Frontera News.

]]>
India’s Industrial Surprise Following Demonetization https://fronteranews.com/news/the-impact-of-indias-demonetization-yet-to-show-on-industrial-production/ Mon, 16 Jan 2017 13:12:14 +0000 https://fronteranews.com/?p=17047 This is post 1 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors” November output surprises If you’re trying to assess the dampening impact of India’s recent demonetization on the country’s industrial sector, this report will take you by surprise. India’s industrial output jumped by 5.7% year-on-year in November 2016. This was […]

The post India’s Industrial Surprise Following Demonetization appeared first on Frontera News.

]]>

This is post 1 of 3 in the series “India’s Economic Indicators Provide Cheer to Investors”

November output surprises

If you’re trying to assess the dampening impact of India’s recent demonetization on the country’s industrial sector, this report will take you by surprise.

India’s industrial output jumped by 5.7% year-on-year in November 2016. This was on the back of a decline of 1.8% in October. Though subject to revision – for now – the November pace is the fastest seen in 13 months.

After the demonetization announcement, which came into effect as it was being delivered on the podium on 9 November 2016, India-watchers have been worried about its impact on the country’s economic growth. There is a general consensus that demonetization will hurt the economy, but the assessment on the force of the impact has been markedly varied.

Given the global economy’s sluggish  has pace, coupled with demonetization having ground consumption activity to a near halt, it would have been natural to see a slowdown in industrial production.

Will the momentum continue?

In terms of percentage growth, electricity – the least weighted in the IIP (index of industrial production) – was the sector of industrial production that rose the quickest, by 8.9% year-on-year in November. The manufacturing sector, which dominates the IIP forming three-fourths of the index, rose 5.5%. Meanwhile, 16 of 22 industry groups in the manufacturing sector posted growth in November. Production of capital goods accelerated by 15%.

The overall growth in the production of consumer goods was 5.6%, led by consumer durables, whose production surged 9.8% in November.

Going forward, the IIP should be expected to register a fall. There was a flurry of impulse buying of consumer durables in the early days of demonetization. After that, consumption activity (INCO) came to a near standstill with empty shops awaiting customers. India’s auto sales and PMI (purchasing managers’ index) indicators have shown signs of a slowdown. A downward revision in the November index wouldn’t be surprising.

Investors in India (PIN) have witnessed declines post demonetization, but the country’s fundamentals remain strongly in place. A rebound is therefore likely given its economic strength, which may translate to financial markets and bring foreign investors back after the initial knee-jerk reaction late in 2016.

The post India’s Industrial Surprise Following Demonetization appeared first on Frontera News.

]]>
Week Ahead in Emerging Markets: 16th January https://fronteranews.com/news/global-macro/week-ahead-emerging-markets-16th-january/ Mon, 16 Jan 2017 08:03:08 +0000 https://fronteranews.com/?p=17043 EM FX ended the week mixed. Markets continue to grapple with the outlook for the so-called Trump Trade, which we believe is intact.  MXN and TRY recovered from the relentless selling of recent days, but both remain vulnerable.  Indeed, if the jump in US yields on Friday continues this week, most of EM should remain under pressure. […]

The post Week Ahead in Emerging Markets: 16th January appeared first on Frontera News.

]]>
EM FX ended the week mixed. Markets continue to grapple with the outlook for the so-called Trump Trade, which we believe is intact.  MXN and TRY recovered from the relentless selling of recent days, but both remain vulnerable.  Indeed, if the jump in US yields on Friday continues this week, most of EM should remain under pressure.

India reports December WPI Monday, which is expected to rise 3.50% y/y vs. 3.15% in November.  December CPI came in slightly lower than expected at 3.41% y/y, and so there are some downside risks to WPI.  RBI next meetsFebruary 8 and it will be a tough call since the impact of the November demonetization is still being felt in the economy.
Russia reports November trade Monday.  Exports are seen contracting -2.7% y/y, while imports are seen rising 5.1% y/y.  As a result, the 12-month surplus is expected to narrow to $88.5 bln from $90.1 bln in October and would be the lowest since February 2005.  Q4 current account data will be reported Tuesday and is expected at $7.4 bln.  If so, the 4-quarter surplus would fall to $21.8 bln, the lowest since Q3 1999.  Higher oil prices should prevent the external balances from deteriorating further in 2017.
Singapore reports December trade Tuesday NODX is expected to rise 7.0% y/y vs. 11.5% in November.  Despite the trade data, the economy remains a bit soft, but rising price pressures are likely to keep the MAS on hold at its semiannual policy meeting in April.
Malaysia reports December CPI Wednesday, which is expected to rise 1.9% y/y vs. 1.8% in November.  Bank Negara meets Thursday and is expected to keep rates steady at 3.0%.  The bank has been on hold since the last 25 bp cut back in July.  It does not have an explicit inflation target, but rising price pressures are likely to prevent any further easing for now.
South Africa reports December CPI Wednesday, which is expected to rise 6.5% y/y vs. 6.6% in November.  It also reports November retail sales that same day, which are expected at -0.4% y/y vs. -0.2% in October.  Inflation remains above the 3-6% target range, but the firm rand has allowed SARB to keep rates steady since its last 25 bp hike to 7% back in March.  Next policy meeting is January 24 and no change is expected.
Colombia reports November IP and retail sales Wednesday.  With the economy remaining sluggish, the central bank is likely to continue the easing cycle with another 25 bp cut to 7.25% at its next policy meeting January 26.  New central bank Governor Echavarria said he favors rate cuts “as soon as we can.”
Bank Indonesia meets Thursday and is expected to keep rates steady at 4.75%.  CPI rose only 3% y/y in December, near the cycle lows and right at the bottom of the 3-5% target range.  Taken along with the firm rupiah, we see a small chance of a dovish surprise.  BI has been on hold since the last 25 bp cut back in October.
Brazil reports mid-January IPCA inflation Thursday, which is expected to rise 6.14% y/y vs. 6.58% in mid-December.  Falling inflation allowed the central bank to cut rates by a bigger than expected 75 bp last week, and it is likely to follow up with another 75 bp at the next meeting February 22.  Minutes from this month’s COPOM meeting may be released on Tuesday.
Poland reports December industrial and construction output and retail sales Thursday.  Data is expected at y/y rates of 1.6%, -12.9%, and 6.9%, respectively.  Meanwhile, price pressures are rising.  CPI rose 0.8% y/y in December, the highest since October 2013 and likely to rise further.  The central bank has said tightening was unlikely until 2018, but we think rate hikes will start this year.
Chile central bank meets Thursday and is expected to cut rates 25 bp to 3.25%.  If so, this would mark the start of the easing cycle after rates have been kept steady since the last 25 bp hike back in December 2015.  Inflation has been below the 3% target for three straight months and within the 2-4% target range for five straight.  The peso has also remained fairly firm, giving the bank leeway to cut sooner rather than later.
China reports December IP, retail sales, and Q4 GDP Friday.  IP and retail sales are expected to slow modestly to 6.1% y/y and 10.7%, respectively, while GDP growth is expected to remain steady at 6.7% y/y.  Despite concerns about capital outflows from China, we think CNY/CNH will follow the broader EM FX trend.

Taiwan reports December export orders Friday, which are expected to rise 9.0% y/y vs. 7.0% in November.  With the mainland economy improving, it’s no surprise that Taiwan is feeling some impact.  Export orders have risen y/y for four straight months, while exports have risen y/y for three straight months and in five of the past six.

 

Win Thin is the Global Head of Emerging Markets Strategy at Brown Brothers Harriman & Co.

The post Week Ahead in Emerging Markets: 16th January appeared first on Frontera News.

]]>
Bill Gross: Are Risk Markets Overpriced? https://fronteranews.com/investing/bill-gross-questions-risk-markets-overpriced/ Mon, 16 Jan 2017 04:23:43 +0000 https://fronteranews.com/?p=17059 This is post 1 of 2 in the series “Bill Gross Shares Perspective on Risk Markets; Predicts a Bear Bond Market” Risk markets are outperforming global bond markets In his first investment outlook for 2017, Bill Gross of Janus Capital (JNS) draws investor focus towards the behavior of risky markets vis-à-vis global markets. “Happiness has […]

The post Bill Gross: Are Risk Markets Overpriced? appeared first on Frontera News.

]]>

This is post 1 of 2 in the series “Bill Gross Shares Perspective on Risk Markets; Predicts a Bear Bond Market”

Risk markets are outperforming global bond markets

In his first investment outlook for 2017, Bill Gross of Janus Capital (JNS) draws investor focus towards the behavior of risky markets vis-à-vis global markets. “Happiness has dominated risk markets since early November and despair has characterized global bond markets,” said Gross in his January 2017 investment outlook.

Visually proven (above) by the movement of the emerging market-tracking funds, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the iShares MSCI Emerging Markets ETF (EEM) against global bond markets since November 2016, emerging markets have indeed been doing well since November last year. The EMB is up about 3% (2.58% as of Jan 13 close); EEM has gained 4.15%, while the global bond fund, the Vanguard Total International Bond ETF (BNDX) is down -1.01% since November 11, 2016. So, what’s driving these risk markets?

What’s driving risk markets?

Risk markets are growing on the back of stronger US growth expected in the light of:

  1. Expected fiscal stimulus
  2. Reduced regulation, and
  3. Tax reform

Risk markets are expecting these 3 Republican promises (as listed above), to boost growth. A hawkish Fed looking to tighten interest rates as we move ahead should help inflation move closer to the Fed’s 2% target. 10-year Treasury rates are already up by 60 basis points, from 1.8% in November 2016 to 2.4% currently.

So, emerging markets are clearly gaining ground on better expectations for US growth. Growth that is still not certain; growth that may need more than just Republican promises; and growth that may require core inflation to rise and deliver. Trumponomics will take its time to effect the US economy (SPY). Yet, risky markets have already begun pricing it in, leading most emerging market indexes up. Argentina’s Merval index is already up 11.6% so far this year, Brazil’s Bovespa up 5.7%, Turkey’s BIST100 up 4.3%, Philippine’s’ PSEi is up 5.8%, and the Dow Jones Asia-Pacific TSM index has gained 3.7% YTD (as of Jan 13).  The big question that arises: are emerging markets being too optimistic?

The post Bill Gross: Are Risk Markets Overpriced? appeared first on Frontera News.

]]>
Road to Brazil’s Comeback in 2017 is Riddled With Obstacles https://fronteranews.com/investing/can-brazil-make-comeback-2017/ Sun, 15 Jan 2017 07:04:35 +0000 https://fronteranews.com/?p=17011 This is post 3 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?” Macroeconomic situation may improve For a country whose economic output contracted by 3.8% in 2015 and is expected to have shrunk by a further 3.5% in 2016, even the talk of a turnaround is a major improvement. In […]

The post Road to Brazil’s Comeback in 2017 is Riddled With Obstacles appeared first on Frontera News.

]]>

This is post 3 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?”

Macroeconomic situation may improve

For a country whose economic output contracted by 3.8% in 2015 and is expected to have shrunk by a further 3.5% in 2016, even the talk of a turnaround is a major improvement.

In 2016, Brazil persevered through the impeachment of its first female President in Dilma Rousseff, and successfully hosted the summer Olympics. Though a lot of people did not like Michel Temer as the replacement for Rousseff, they welcomed his team in hopes of a better economic future. The country capped off the year in flames with austerity measures in the form of the PEC 55 constitutional amendment which put a cap on government spending at a time when the country was reeling under economic strain.

After such an event filled 2016, Brazil looks fondly towards 2017 as a year when it firmly gets back on the path to recovery. However, this desired path is riddled with obstacles as it currently stands.

Risks to Brazil’s economic recovery

The Michel Temer government has shown an inclination to battle economic problems on all fronts to get the economy going again, and the PEC 55 amendment was a step in that direction. Next, it plans to reform the pension system which is another tough measure that will help buoy the economy in the long-term.

However, in a nation where many people do not have jobs or enough income to afford two square meals a day, actions for the greater good of the economy are balanced by other factors. While the government has to tighten its purse strings to improve its finances, the economy requires a component of public spending to keep the broader population afloat. Further measures to tighten government finances will spark similar protests as when PEC 55 was announced.

Meanwhile, though aggressive rate cuts will do their bit to stimulate the economy, their impact will not be felt over the short-term. Standalone monetary measures take about two to three months to show their impact. However, considering that Brazilian consumers are currently debt ridden, spending is expected to remain quite conservative even with rate cuts. Which means the impact of monetary policy measures may take six months to a year to show any visible impact.

Keep an eye on Brazilian equities

Though Brazil struggled economically and politically in 2016, its equities (EWZ) did exceptionally well. 2017 has seen as strong start for the country’s equities, with the MSCI Brazil Index up 4.5% in YTD 2017 until January 11. Meanwhile, the MSCI Brazil ADR Index is up 11.4%.

If macroeconomic conditions improve materially, it would give international investors further confidence to add Brazilian equities to their portfolio. But it will also be important to keep an eye out for social unrest. The ouster of Rousseff momentarily filled both the Brazilian people and investors with hope for a better future, and this was reflected in equity prices last year. However, if the future shines less bright in 2017, then these gains could turn to declines very quickly.

The post Road to Brazil’s Comeback in 2017 is Riddled With Obstacles appeared first on Frontera News.

]]>
Brazil Just Got A New Tool To Stimulate Growth https://fronteranews.com/investing/inflation-falling-will-see-aggressive-monetary-easing-brazil/ Sun, 15 Jan 2017 07:03:35 +0000 https://fronteranews.com/?p=17008 This is post 2 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?” Inflation falls within target range There is good news on the horizon for Banco Central do Brasil –Brazil’s central bank – as far as inflation is concerned. The indicator, which has troubled monetary policymakers, has finally fallen below […]

The post Brazil Just Got A New Tool To Stimulate Growth appeared first on Frontera News.

]]>

This is post 2 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?”

Inflation falls within target range

There is good news on the horizon for Banco Central do Brasil –Brazil’s central bank – as far as inflation is concerned. The indicator, which has troubled monetary policymakers, has finally fallen below the upper end of the central bank’s target range.

The target mid-point of inflation in Brazil is 4.5% with a tolerance level of 2 percentage points on both sides, thus placing the upper end of the inflation target at 6.5%. Data from Brazil’s statistics agency, released before the scheduled monetary policy meeting, showed that CPI (consumer price index) inflation fell to 6.29% in 2016, much lower than the 10.67% pace seen in 2015.

Starting in 2017, the tolerance range has been reduced to 1.5% on both sides of the mid-point. Hence, the central bank will target inflation to remain between 3% and 6% this year.

Inflation expectations

In the previous article of this series, we saw that the Banco Central do Brasil was not positive on economic activity.

However, it sounded pleased with recent developments in the rise of prices. In its monetary policy statement for January, the bank stated that “recent inflation releases were more favorable than expected. There are signs that the more widespread disinflation process has reached IPCA components that are most sensitive to the business cycle and monetary policy.”

In its latest weekly Focus Survey of economists, the median of expectations for IPCA inflation in the next 12 months stood at 4.8%. Meanwhile, in the central bank’s reference scenario, inflation should be around 4% in 2017 and fall to 3.4% in 2018. The central bank noted that market expectations for inflation are 4.4% and 4.5% respectively for 2017 and 2018.

Impact on monetary policy

Though it is too early to say that the challenge posed by inflation has been conquered, especially in light of the current global economic uncertainties, the fall in inflation is a welcome change for Brazil’s government.

With inflation under some control, policymakers can focus their efforts on resuscitating economic activity in Brazil, on which they have a bearish view at present. Though rate cuts alone would not get Brazil’s economy back on track, they would provide policymakers with an additional tool that they were previously unable to use due to high inflation – monetary policy.

The post Brazil Just Got A New Tool To Stimulate Growth appeared first on Frontera News.

]]>
Brazil Kickstarts 2017 With Surprise of Aggressive Rate Cut https://fronteranews.com/investing/banco-central-brasil-begins-2017-aggressive-rate-cut/ Sun, 15 Jan 2017 07:02:26 +0000 https://fronteranews.com/?p=17005 This is post 1 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?” Selic rate slashed Brazil’s central bank started 2017 off with a literal bang as it effected a sharp cut to its key Selic rate. The Selic was slashed by a sharper-than-expected 75 basis points to 13% on January […]

The post Brazil Kickstarts 2017 With Surprise of Aggressive Rate Cut appeared first on Frontera News.

]]>

This is post 1 of 3 in the series “Will 2017 Springboard Brazil Into A Brighter Future?”

Selic rate slashed

Brazil’s central bank started 2017 off with a literal bang as it effected a sharp cut to its key Selic rate. The Selic was slashed by a sharper-than-expected 75 basis points to 13% on January 11. The vote by members of the central bank’s rate setting committee, or Copom, was unanimous.

Most analysts surveyed by Reuters and 9 out of 12 economists surveyed by the Wall Street Journal had expected a more moderate 50 basis point cut. Only a handful had predicted the 75 basis point cut which was eventually effected last week. At 13%, the Selic rate is close to a two year low.

With the rate cut in January, the central bank has extended its rate cutting cycle to three meetings. It had cut the Selic by 25 basis points in each meeting in October and November 2016.

Economic outlook

The central bank appears to remain relatively unenthusiastic about the economy. It noted that since the Copom’s last meeting, economic activity was weaker than anticipated judging by leading indicators.

It also stated that Brazil’s economic recovery could be delayed further and could be slower than initially forecasted.

However, one aspect worthy of note was that the central bank did not place as much emphasis on external economic conditions as it had in previous meetings. This is especially important in light of its references to the US and the change of political guard there.

Unlike Mexico (EWW), Brazil is not as dependent on the US for trade. According to World’s Top Exports, while 81% of all Mexican exports landed in the US in 2015, only 12% of Brazil’s exports were shipped to Uncle Sam in the same year. China was Brazil’s top export destination, with 18% of its total exports by value shipped to the Asian giant.

Coming back to Brazil, the primary reason for the aggressive easing by the Banco Central do Brasil was the fall in inflation. Let’s look at the reasons why this happened in the next article.

The post Brazil Kickstarts 2017 With Surprise of Aggressive Rate Cut appeared first on Frontera News.

]]>
Impeachment of South Korea President Is Haunting Consumers https://fronteranews.com/investing/park-geun-hye-episode-weighing-koreas-economy/ Fri, 13 Jan 2017 17:03:53 +0000 https://fronteranews.com/?p=17019 Bank of Korea holds rates The Bank of Korea held its base rate at 1.25% in its monetary policy meeting on January 13, 2017. This was the seventh successive month of status quo on the rate after it was reduced by 25 basis points in June 2016. Korea’s central bank has been on a rate […]

The post Impeachment of South Korea President Is Haunting Consumers appeared first on Frontera News.

]]>
Bank of Korea holds rates

The Bank of Korea held its base rate at 1.25% in its monetary policy meeting on January 13, 2017. This was the seventh successive month of status quo on the rate after it was reduced by 25 basis points in June 2016.

Korea’s central bank has been on a rate cutting cycle since July 2012; the last time Korea had witnessed a rate hike was in June 2011.

The Bank of Korea judged that economic growth has slowed due to the weakening of the recovery in domestic demand. This has been primarily due to a deterioration in consumer confidence, which the Park Geun-hye incident has been responsible for to a large degree.

Impeachment haunts consumers

President Park Geun-hye was impeached after a 234-56 vote for the motion on December 9, 2016. She was accused of allowing her friend and aide Choi Soon-sil – who did not have any official position – to meddle in the affairs of the government. Soon-sil also used her association with Geun-hye to demand funds from conglomerates, or chaebols, like Samsung and Hyundai.

This impeachment resulted in a tremendous loss of consumer confidence which nose-dived in excess of a seven year low in December 2016.

Monetary policy going forward

Even after a decline in consumer spending, the Bank of Korea did not cut rates because it expects exports to improve in the second half of the year on the back of better economic conditions globally. The export-driven economy will receive a shot in the arm if China, a major export destination, witnesses marked improvement in its economy.

However, the central bank reduced its forecasts for economic growth in 2017 to 2.5% from 2.8% in October. The decline in consumer spending was the primary reason for this reduction. Meanwhile, it cut its inflation projections for the year a notch to 1.8% from 1.9%. The bank has a target of 2% inflation in the medium-term.

Given its outlook, the Bank of Korea would like to hold off a rate cut for as long as possible. Especially in light of a monetary tightening cycle in the US, as a rate cut at a time when the US is hiking rates could result in capital outflows.

However, if consumer confidence does not resuscitate and geopolitical incidents weigh on global growth, the central bank could effect up to two hikes in this calendar year to support the economy.

Korean equities (EWY) have started the year well; the MSCI Korea Index is up 6% this year until January 12. In the absence of a major crisis of confidence, coupled with improvement in China, stocks from the country can be expected to do well.

The post Impeachment of South Korea President Is Haunting Consumers appeared first on Frontera News.

]]>