What has changed in EM - BBH

Marc Chandler, Global Head of Currency Strategy at Brown Brothers, shares his views on the emerging markets, with key quotes found below.

China eased curbs on coal use for heating in the northern provinces to cope with colder weather.  The Ministry of Environmental Protection eased the coal curbs after some provinces reportedly suspended some household heating and curtailed factory usage due to shortages of natural gas.  China’s November trade data showed record imports of natural gas, as well as strong demand for coal and iron ore.

Poland announced a cabinet shuffle.  Prime Minister Beata Szydlo will step down, with Deputy Prime Minister and Finance Minister Mateusz Morawiecki picked as her successor.  The shuffle comes halfway through the 4-year term of the ruling Law and Justice government.

Poland’s lower house approved the controversial judicial reform bill.  The bill now goes to the Senate.  If approved, the bill would hamper the independence of the judiciary.  The EU has issued several warnings already, and some sanctions are likely to be seen if the reforms are enacted.

President Trump announced that the US recognizes Jerusalem as Israel’s capital.  The US embassy will be moved there, upending 70 years of US policy that recognized Tel Aviv as the capital.  Hamas called for a third intifada in response to the controversial move.

Brazil COPOM was more dovish than expected after cutting rates 50 bp to 7.0%.  Many (including us) thought this was the last cut but the statement noted that it "views an additional moderate reduction of the pace of easing as appropriate."  This suggests a 25 bp cut to 6.75% will be seen at the next meeting on February 7.

Press reports that Brazil’s lower house will begin the vote on pension reforms on December 18.  The news is surprising, as most analysts and politicians believe the government lacks the votes needed to pass.  Indeed, President Temer reportedly sees 280 votes in favor vs. 308 needed to pass.

Chile central bank cut its 2017 and 2018 inflation forecasts and shifted to a more dovish stance.  2017 inflation is now seen at 2.1% vs. 2.4% in September, while the 2018 forecast was cut to 2.9% from 3% previously.  The bank noted that “Downward deviations in short-term inflation should be monitored with special attention.  Inflation convergence could be affected, in which case a more expansionary monetary policy would be required.”