South Africa, China and Brazil Make Emerging Markets' Headlines This Week

1) South African President Jacob Zuma fired Finance Minister Nene as well as replaced him with little-known ANZ lawmaker Donald Van Rooyen; 2) S&P revised the outlook on South Africa’s BBB- rating from stable to negative; 3) People’s Bank of China announced the publication of a brand new CNY basket on its website; 4) Moody’s put Brazil’utes Baa3 rating on review with regard to possible downgrade; 5) Brazil’s Supreme Court suspended for a 7 days the creation of the congressional impeachment committee; 6) Relations between Brazil V . p . Temer and President Dilma Rousseff have damaged sharply; 7) Argentina’s central bank President Alejandro Vanoli resigned; 8) The Venezuelan ruling party lost control of the National Assembly within last weekend’s elections

In the Them equity space, Qatar (+0.2%), Colombia (+0.2%), and South america (-0.4%) have outperformed over the last week, whilst UAE (-6.0%), Poland (-5.6%), and Turkey (-5.4%) have underperformed.  To put this in better context, MSCI EM fell -5.0% in the last week while MSCI DM fell -3.0%.

In the actual EM local currency relationship space, the Philippines (10-year yield -11 bp), Singapore (-8 bp), and South korea (-6 bp) have outperformed over the last 7 days, while South Africa (10-year yield +172 british petroleum), Brazil (+41 bp), and Poultry (+41 bp) have underperformed.  To put this particular in better context, the actual 10-year UST yield fell -10 bp over the past week.

In the EM FX space, PKR (+1.0% vs. USD), CZK (smooth vs. EUR), and EGP (-0.1% vs. United states dollar) have outperformed over the last week, while ZAR (-10.3% vs. USD), MXN (-4.2% vs. USD), and BRL (-3.3% vs. USD) possess underperformed.

1) South African President Jacob black Zuma fired Finance Minister Nene and replaced him with little-known ANZ lawmaker David Van Rooyen.  Nene was removed from their position after only 19 months.  Zuma knows the investment grade rating is in serious trouble.  So what does he do?  He or she fires the one guy that'utes been trying to protect that rating.  Nene’s removal shows that there was a clash with President Zuma about how deep the actual fiscal cuts should be.  All of us reiterate our long-standing call the nation gets cut in order to sub-investment grade, and now it's most likely sooner rather than later.

2) S&P revised the outlook on South Africa’utes BBB- rating from stable in order to negative.  That same day, Fitch cut its rating on South Africa by a notch to BBB-.  This particular happened before Nene was ignored, calling into question President Zuma’s judgment.  Here too, we think a downgrade is really a done deal, as our very own ratings model has Nigeria at BB/Ba2/BB.  Moody's still has it at Baa2, but that won't last either.

3) People’s Financial institution of China announced the actual publication of a new CNY container on its website.  This said it was meant to produce a shift in how markets view exchange rate actions, with the obvious intent of lessening the focus on the bilateral USD/CNY price.  We think this is a benign move, and is simply part of the development of China’s FX policy.

4) Moody’s put Brazil’s Baa3 score on review for possible downgrade.  This is a stronger motion than just moving the perspective to negative.  The agency wrote that improvement in Brazil’utes economic and fiscal performance "now appears unlikely within 2016.”  S&P already has Brazil at sub-investment grade BB+, so the Moody’s downgrade would likely result in some forced selling through institutional investors that require an investment quality rating from at least two of the major rating agencies.  We think a downgrade is a done deal, as our own ratings model has Brazil from BB-/Ba3/BB-. 

5) Brazil’s Supreme Court suspended for any week the creation of the congressional impeachment committee.  The move came after the government lost its bet to make the process of appointing panel members public.  Decision to suspend was made by Rights Fachin, who was appointed to the top court by Rousseff and so the move offers bad optics.  We still think that the impeachment process is a net negative for Brazil assets, further delaying and/or preventing much-needed financial adjustments.   

6) Relations between South america Vice President Temer and President Dilma Rousseff possess deteriorated sharply.  In a letter published by all major newspapers in the country, Temer said Rousseff never reliable him and only gave him a figurehead role for the past five years. Ironically, Temer would replace Rousseff ought to she be impeached by Our elected representatives. 

7) Argentina’s central bank Leader Alejandro Vanoli resigned.  Incoming President Macri had said Vanoli isn’t qualified, and has selected Federico Sturzenegger to replace him.  Sturzenegger has a Ph.D. in economics from MIT.  The economic team is shaping up to be a strong one and it bodes well with regard to policy.  New Finance Reverend Alfonso Prat-Gay is well regarded by the markets, with experience at a major US bank as well as central bank governor.

8) The Venezuelan ruling party lost control of the National Assembly in last weekend’utes elections.  Furthermore, the opposition appears to have won a super-majority that will give it greater control and impact over policies.  It's a great sign, of course, but we believe President Maduro is still in the driver’utes seat.  We need to see Maduro replaced (like Kirchner/Fernandez were in Argentina) prior to we can get more optimistic.

Emerging Markets: What has Changed is republished along with permission from Marc to Market