Bank of America names its top emerging picks for 2016

The year 2016 isn’t very old but it already looks as though prediction is a game for the very brave. Chinese shares have already chalked up two days of plunge and shutdown; there’s new froideur between Saudi Arabia and Iran; and it seems very possible that North Korea has a thermonuclear weapon we didn’t know about.

Still, the foretelling goes on, with Bank of America Merrill Lynch latest into the fray with its top emerging market calls for this year.

“Our top trades for 2016 look to take advantage of monetary policy divergence within developed markets, between DM and EM, and within EM,” the bank’s analysts write.

“We are cautious on the return outlook given risks of a faster Federal Reserve (monetary) tightening, a sharper Chinese slowdown, volatile oil prices and US high-yield unraveling,” they go on.

Its not likely to be a blockbuster year though, with forecast returns of 1% for local EM debt, -0.4% for over all EM foreign exchange and 2.7% for EM’s external sovereign debt.

So, here’s the list:

BoAML’s top foreign exchange pick is to be long both Mexico’s peso and Poland’s zloty against the euro, while being short a basket of Korean won, Malaysian ringgit against the dollar, and South Africa’s rand against the rouble – all on the basis of monetary policy divergence.

The bank’s favourite local-debt long positions are in Russia, India and Brazil.

It prefers Russian paper to Turkish, fretting that, “the latest news on macro policy and constitutional changes” raises the risk that Turkey will be stripped of its investment-grade credit ratings.

Those who like Argentina’s chances under its new, more conciliatory and market-friendly administration might like to consider its EUR GDP warrants, perhaps hedged in currency terms in order to minimise exposure policy transition there. BoAML has raised Argentina to overweight thanks to the change in government.

However, events in China are clouding the outlook. Its the largest EM, after all, and its start to the year has been an epic, just not one that’s been fun to watch.

“We remain cautious amid renewed Chinese slowdown concerns and the global equity market rout,” the bank’s analysts conclude.

This article first appeared here: https://news.markets/bonds/bank-america-names-top-emerging-picks-2016-7901/

No early Christmas gift for George Osborne; UK borrowing soars

The UK borrowed far more than expected in November, according to official figures.

Public sector net borrowing totalled £14.2 billion, up from £7.4 billion in October and way ahead of market expectations, which had been for a turnout of £11.8 billion in what’s often a weak month for government receipts.

Economists have long been worried that the UK will miss its borrowing targets, but in his Autumn Statement Chancellor of the Exchequer George Osborne insisted that he was on track to move the country into a primary budget surplus by 2019/20.

However, while this month’s data look bad for Number Eleven Downing Street, the National Statistics office itself suggests looking at the cumulative year-to-date figures instead, emphasising the volatility of the monthly series.

Here the news is slightly better, with the central government’s cash requirement down £8.2 billion from January to November 2014, at £49.4 billion.

Still, the pound is likely to face headwinds as the New Year gets under way. Borrowing remains high and the Bank of England appears in no hurry to follow the Federal Reserve in raising interest rates. Moreover, the battle lines are now being drawn over the UK’s place or lack of one in the EU, which will keep the ‘Brexit’ issue smouldering ahead of a referendum on the issue, which must come relatively soon.

Sterling is the other currency “I remain wary of”, writes Kit Juckes, Societe Generale’s long-serving macro strategist, who worries too about the Australian and New Zealand dollars.

“We’ll have to live with a weaker pound in 2016,” he adds.

This post first appeared on news.markets: http://news.markets/bonds/no-early-christmas-gift-george-osborne-uk-borrowing-soars-7235/

Putin puts on a brave face, but the tumbling ruble tells Russia’s real story

Russian President Vladimir Putin held forth with customary brio at his meet-the-press session on Thursday. This, now annual, event allows him to answer questions of the “Mr. President, exactly why are you so wonderful?” sort from adoring local journalists.

However, not even Putin’s presentation skills can paper over the cracks in Russia’s economy, which are growing alarmingly.

The country was never going to do well in the face of a commodity price rout, and sure enough the ruble has been the worst-performing emerging market currency over the past month, falling 6% against the dollar. Indeed, it is now hovering around record lows, with the greenback getting you RUB71.018.

This is hardly surprising given the ruble’s link to global oil prices, well illustrated by the chart below.

Source: Capital Economics

And things don’t look that much better for the Russian currency or the economy underlying it in the New Year.

“Looking ahead, the combination of persistent capital outflows, a fragile economic recovery and political concerns, mean that the ruble is likely to remain under pressure,” writes Capital Economics’ Liza Ermolenko in a note on Friday.

What makes matters worse for Russia is that oil prices are falling at a time when Europe is also using a lot less of Russia’s natural gas thanks to a relatively mild winter and easy access to a cheaper energy alternative in oil.

Russian consumers are also taking a hit, with both wages and retail sales collapsing. For all Putin’s showmanship, it seems very unlikely that Russia or its currency are going to loom large in the analysts’ New Year recommendations.

Originally published here: http://news.markets/commodities/putin-puts-brave-face-tumbling-ruble-tells-russias-real-story-7056/