Credits Suisse’s analysts ask whether the slope of the US treasury curve drives emerging market curve slopes. With many people forecasting a steepening trend in the 30- to 10-year US treasury curve, the team re-visited last year’s finding that while emerging market spread curves appeared to flatten as the US curve steepened, there was no statistically significant relationship.
Now, extending the analysis to one-week changes, they find not only no statistical relationship, but no optical relationship either.
Credit Suisse go on to recommend unwinding short basis trades in Venezuela. “As has been the case with many other sovereigns, the basis between CDS and bonds in Venezuela has fallen recently, and is now well below its recent highs,” says Donato Guarino. The basis of ten-year Venezuela bonds stands out as particularly low, given the levels of spreads, compared to other emerging markets sovereigns. Credit Suisse had previously recommended selling both the VE 16N and the VE 18N in favour of a ten-year CLN. Given the bullish bias of these positions, they now recommend that investors with a neutral or bearish view should unwind these short basis trades.
Citigroup’s Andrew Howell reports that earnings momentum has rebounded in emerging Europe, the Middle East and Africa following a summer lull. A healthy second quarter results season and still-buoyant commodity prices have helped lift 2006 earnings expectations by nearly 10% over the past three months. This contrasts with Asia, where earnings momentum is sagging.
Weaker currencies and strong commodity prices have driven earnings forecasts sharply higher in South Africa, Russia, and Poland. Central European and Russian banks have also seen some uplift. Turkey has been hit by downgrades (11% to 2006 local currency forecasts). He raises Turkey to neutral (from underweight) and cuts Poland to a small underweight (from overweight): an improving external environment should be positive for Turkey, which is the least-expensive market in our region, while valuations in Poland look challenging
Barclays Capital’s John Scoffin reassures that Asian export momentum continues. “As the focus shifts to a sharper-than-expected slowdown in US consumer demand, the evidence supports the view that things are holding up very well.” For example, Thailand’s July trade report posted a small deficit, helped by strong exports. Exports to countries other than the United States are picking up, as shipments to the US slow, but Asian data do not imply a US demand slump.