The week saw renewed pressure on emerging market (EM) exchange rates, led by the usual suspects, Argentina and Turkey. The rand did not escape the damage and did a little worse than the JP Morgan EM benchmark, that gives a large weight to the Chinese yuan and the Korean won. But it was much more a case of EM exchange rate weakness rather than US dollar strength.
Source: Bloomberg
The spread between US and German 10-year yields has stabilised (perhaps taking a little away from US dollar strength), while the US term structure of interest rates continues to flatten as the longer term rates fail to respond to higher short term rates. The cost of borrowing in the US beyond two years has not been increasing, despite the Fed’s intentions to raise rates in response to sustained US economic strength.
Source: Bloomberg
The pressure of capital withdrawn from EMs was reflected in a widening of the spreads on US dollar-denominated debt issued by EM borrowers, including SA. The spread on five-year RSA debt widened from around 202bps last week to 230, while Turkish debt of the same duration commands a risk premium of 562 bps – compared to 481 bps the week before. If only in a relative sense, SA’s credit rating has improved even as our debt trades as high yield (alias junk). The rating agencies, however, appear to be in no hurry to confirm this status for SA debt.
Part of the explanation of the weak rand and the decline in the value of the JSE, more in US dollars than in rands, has been the dramatic decline in the value of Naspers – up over 11% the week before last and down 7.7% last week. The Hong Kong market, where Tencent is the largest quoted company and in which Naspers holds over 30%, however returned 0.8% in US dollars last week. it is consistent that it is now among the weakest equity performers going into the new week. China and Chinese internet companies, in particular, have been a drag on emerging markets. More optimism about the Chinese economy is essential to the purpose of any emerging market currency and equity comeback.
Source: Bloomberg