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Default rates again favour EM over the US

Weekly investor research

13 June 2016

Last week produced another good week of relative default rate performance for EM HY corporates compared to their US counterparts. In Latin America, PPK as president is good news for Peru, but the government attempts to split the opposition in Venezuela, while multiple factors appear to be conspiring against Mexico right now. In Brazil, Goldfajn replaces Tombini at the Central Bank and Colombian inflation ticks up, albeit most likely on a temporary basis. In Russia, the Central Bank starts to cut rates and South Korea uses its bank recapitalisation fund to support policy banks. However, the global market backdrop is souring as markets digest mounting evidence that the monetary authorities are running into major constraints to further easing, especially in Europe and Japan. The US outlook is also pregnant with vulnerability after the bad payroll number and the sharp decline in hiring and inflation expectations. In these circumstances, the rising odds of Brexit can do some damage, though we think the impact of Brexit per se on EM is minimal. After all, the UK is just a small European country.

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