Weekly Intelligence Report – Commodity currencies, emerging markets recovery and Russia

10 May 2016

Emerging markets have seldom been out of the headlines over the past few years. The end of the commodity super-cycle coincided with a rolling Eurozone crisis, a structural slowdown and economic rebalancing in China, and the tapering off of unconventional monetary policy and the advent of a tightening cycle in the United States. Macroeconomic and market developments have reinforced the inter-connectedness of developed and emerging markets in ways which have surprised all of us. This year has proved no exception, with pronounced emerging markets weakness in January being replaced by a strong relative recovery since mid-February.

Emerging markets are the focus of this edition. In the first of our articles, Colin Harte examines the recent recovery in commodity currencies, and argues that this has been driven more by changing perceptions of the stance of US monetary policy than by underlying changes in the supply and demand for commodities, with attendant implications for the rally’s strength and durability. In the second of our pieces, Daniel Morris turns the spotlight on the outperformance of emerging market equities versus developed market equities so far this year. A careful analysis of relative sector performance shows that this recovery is surprisingly broad-based, suggesting that it is being driven by more than a cyclical rebound in commodity prices alone.

Bryan Carter moves the discussion from the general to the specific, arguing that the independence and credibility of Russia’s central bank has opened up an interesting idiosyncratic opportunity in Russian local rates.

Three views, three different perspectives on different aspects of the same phenomenon -the unexpected outperformance of emerging market assets so far this year.

Happy reading!

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