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20 December 2012



Global market sentiment was choppy due to lingering uncertainty about the US fiscal cliff issue. Still, Emerging Markets sovereign debt produced small positive returns, despite a sell-off in US treasuries. Higher spread corporate high yield debt rallied more, up 44bps since Friday last week. Emerging Markets currencies also rose strongly, clocking up 34bps this week. Local Currency bonds returned 49bps, while the strongest performance in Emerging Markets last week was in equities, up 94bps.


US stock markets rose early in the week on optimism that House Republicans and the White House would reach a deal on the fiscal cliff. Sentiment weakened later in the week when talks appeared to stall following a declaration from House Republicans that they would proceed with a vote on the so-called Plan B, a proposal not acceptable to the White House. Our base case is that a deal will eventually be struck, either late this year or in early January after tax rises and spending cuts have actually taken place. But it is not possible to rule out a far worse scenario. The challenge facing Congress in dealing with the fiscal cliff issue highlights two important points, in our view. First, the US Congress is likely to struggle to address any of the important long-term fiscal issues facing the US. Second, the recent performance of the EU 27 member states in moving forward on issues such as bank regulation, Greek debt restructuring, and fiscal reforms almost look impressive in comparison. The bigger picture, however, is that both Europe and the US face serious challenges in the coming years and investors should not consider bonds in these HIDCs (Heavily Indebted Developed Countries) to be ‘risk free’. The fiscal cliff issue also matters to Emerging Markets, but mainly as a potential source of asset price volatility. We believe investors should aim to exploit any such temporary volatility to add to positions in Emerging Markets, particularly given the modestly brighter backdrop for global growth going into 2013. Over the past week, US stocks rose 1.6%, while 10 year US treasuries continued their sell-off, rising from 1.70% on Friday to a peak of 1.82% mid-week, now 1.78%. EURUSD also continued the recent rally, briefly trading above 1.33, now 1.3220. The US treasury market and the US dollar price action is worth noting: Positive sentiment weakens both. Surely, the direction of travel over the medium term as the HIDCs slowly overcome their enormous problems will be for far more of the same. In other developments, weaker US housing data softened the outlook for Q4 growth to just north of 2%, while manufacturing in the New York area also weakened. In Europe, the Eurozone current account balance continued to improve. The Eurozone current account now has a 1.8% of Eurozone GDP surplus, up from -0.7% of GDP in 2008. Standard and Poor’s, the ratings agency, raised Greece’s sovereign debt rating to B- (stable) from selective default. Germany IFO was stronger than expected. In Japan, Abe Shinzo of the LDP won the election on a message of active policies to achieve higher inflation, thus echoing the broader sub-text of policies in other HIDCs. In Italy, the immediate focus is the passage of the budget, which will likely give rise to Prime Minister Monti’s resignation and early elections.

Latin America

In Brazil, Finance Minister Mantega announced rising gas prices and new fiscal measures to help new industries. Capital controls were eased further by lowering reserve requirements on short dollar positions, while strong FDI inflows continued. On a 12-month rolling basis, FDI now stands at 2.9% of GDP, or USD66.5bn (greater than the current account deficit). A court in Ghana released an Argentinean ship from detention after rejecting a petition from holdout investors for confiscation. The US government also positioned itself on the side of the Argentinean government with a writ to the New York Appeals Court. In Venezuela, uncertainty continues to surround President Chavez’s health and whether he will be able to attend his own inauguration on 10 January. In Colombia, the parliament made a last minute u-turn to approve a significant lowering of the withholding tax rate on foreign investments into the local bond market. The rate was reduced to 14%. Earlier parliament had discussed a 25% tax rate.


South Korean voters elected Park Geun Hye as Korea’s first ever female president. She won a strong mandate for market-friendly policies to improve the economic performance of the country. Taiwan’s central bank left rates unchanged at 1.875%. The outlook on the sovereign bond rating of the Philippines was raised to positive by Standard and Poor’s.

Eastern Europe, Africa, and Middle East

Angola, Nigeria, and Ghana announced plans to issue up to $3.75bn of sovereign bonds in 2013 as the region continues to integrate into global capital markets. Output from Ghana’s Jubilee oil field reached 105K barrels per day in December from 85K barrels per day in November. Ghanaian producer prices also dropped to 15.8% yoy in November from 19.6% in October. In South Africa, President Jacob Zuma was re-elected ANC leader with a strong mandate as ANC rejected nationalisation of mines. The central bank in the Czech Republic left rates unchanged at 0.05%. Russia auctioned 7 and 15 year OFZ bonds. Turkey’s central bank left lending rates unchanged, but lowered the one-week repo rate by 25bps, while at the same time raising reserve requirements by 50bps. Hungary’s central bank cut rates by 25 bps to 5.75%. The slowdown in Poland continued following a weaker than expected industrial production number.



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