MUFG: An improving European outlook is the next EM growth catalyst

MUFG: An improving European outlook is the next EM growth catalyst

Opkomende markten Vooruitzichten
Outlook vooruitzicht (03)

An improving European outlook is the next growth catalyst for emerging markets. That states MUFG in a market commentary. 

It is becoming increasingly apparent that the global economic recovery thus far in 2021 has been more sequenced than synchronised. What started as a China and Asia-led global rebound has pivoted to the US, with the baton now being gradually passed to Europe as vaccine inoculations gather pace.

We believe that a stronger European outlook and its follow through via trade and commodities, which in tandem with still loose financial conditions, could be the next driver of EM growth – reflecting Europe’s role as the biggest destination for EM exports, the largest capital provider to EMs and Europe-domiciled funds being the principal investors into EMs.

FX views

EM FX has been consolidating at weaker levels following the hawkish Fed policy surprise on 16 June and is becoming more strongly correlated with US short rates – strongest 30 day correlations are MXN and ZAR, weakest KRW and CLP.

Trading views

For EMs to have a better H2 2021, there either needs to be carry or growth – after all, fundamentally this is what EM is about and what an investor need to see in order to move money to the asset class.

Week in review

Over the previous week, PMIs across EM EMEA gained further traction in June, Saudi FX reserves declined to a near 11 year low (but remain at ample levels to safeguard the USD peg), and June inflation eased in Poland.

Week ahead and calendar

In the week ahead, we will have rate decisions in Israel, Poland and Romania, alongside a host of June inflation readings across EM EMEA.

Forecasts at a glance

We remain resolutely bullish on the EM EMEA region, albeit with considerable heterogeneity. We provide our real GDP, fiscal and current account balance, inflation, rates and FX forecasts for this year and 2022.

Core indicators

Notwithstanding the hawkish Fed pivot on 16 June, EM capital inflows attracted USD28.1bn in June, up from USD10.9bn in May, primarily due to fresh debt issuances across EMs, alongside core contributions of Chinese flows.