Emerging markets | South Africa in the spotlight as Brazil introduces pension reforms

Brazilian President Michel Temer

With a shortened week in the U.S. and China, emerging markets may provide some of the best clues to whether stocks can extend their strongest rally since 2016.

The MSCI Emerging Markets Index of equities climbed 5 percent last week – its best five days since 2016 – while a gauge of developing-nation currencies rose 0.9 percent. The Bloomberg Barclays index of local-currency government bonds advanced 1.7 percent.

In the week ahead, South Africa will stay in the spotlight as Finance Minister Malusi Gigaba presents the national budget. The event comes just a week after Cyril Ramaphosa replaced Jacob Zuma as president.

Elsewhere, S&P Global Ratings is set to review Russia’s sovereign credit score, Kenya plans to complete an international bond sale, and there may be a new twist in the fate of Brazil’s pension reform bill, after President Michel Temer ordered the military to take control of Rio de Janeiro’s streets.

Economics matters

With Zuma no longer South African president, investor focus turns this week from politics to economics. Gigaba will present the budget tomorrow, potentially providing traders with the first indications about the government’s willingness to boost growth and tackle unemployment under Ramaphosa’s stewardship.

South African stocks had their best week since 2009 in the five days through Feb. 16, while the rand had the biggest gain versus the dollar after the Russian ruble, adding 3.4 percent. UBS AG said last week the rand’s appreciation may limit further gains for stocks.

Ratings and timings

S&P Global Ratings is due to review Russia’s sovereign rating on Feb. 23, with some investors, such as Amundi Asset Management, saying it’s only a matter of time before the nation’s debt is lifted from junk. Russia’s Eurobonds may see more than USD2 billion of inflows if the nation wins back an investment-grade score, according to Societe Generale SA.

Kenya is aiming to issue as much as $3 billion of securities, including a 30-year bond, which would be its longest maturity yet. But the timing isn’t great: Moody’s Investors Service moved the nation’s credit rating deeper into junk last week, citing a weakening fiscal outlook, rising debt and a deterioration in debt affordability.

Pension bill

It’s make-or-break for Brazilian President Michel Temer’s pension reform, with lawmakers set to discuss the proposal on the floor of the lower house. Brazilian markets have rallied this year on speculation that the bill will be approved, with the Ibovespa index of stocks rising more than 10 percent.

Violence in Rio de Janeiro, which prompted the national army to take control of public security on Friday, may still delay the vote, because changes to the constitution can’t be made while a military intervention is in effect.

Eyes on Guajardo

Investors will monitor comments by Mexico’s chief Nafta negotiator Ildefonso Guajardo, who speaks at a conference tomorrow in what may be his last public address before the start of the seventh round of negotiations. Mexican assets will get a lift from any signs of progress in securing the future of the $1 trillion North American Free Trade Agreement.

The peso has strengthened more than 6 percent this year, second only to the rand, though some analysts say the market is underplaying the risk of leftist Andres Manuel Lopez Obrador winning the July presidential election. Exotix, a research firm that specializes in the riskiest assets, says an Obrador win could prompt a 15 percent selloff in the benchmark stock index and boost local bond yields by 4 percentage points.

Not all quiet on the Asian front

With China and Taiwan closed for Lunar New Year holidays until the middle of the week, traders in Asia will turn their attention to Thailand’s baht and the Philippine peso.

Thailand’s growth accelerated to 3.9 percent in 2017, according to analyst estimates compiled by Bloomberg. That may intensify the headache facing policy makers, who are closely monitoring the exchange rate.

The peso may be also in focus after it touched the weakest level since 2006 last week. Persistent fund outflows from the stock market have weighed on the currency, the worst performer among developing-nation peers this year after Argentina’s peso. MDT/Bloomberg