OVERNIGHT NEWS
# Price action in Asia points to possible FX intervention in yuan, ex-PBoC official Songcheng calls yuan “overbought”, USD/CNY climbs from 6.3611 to 6.3720, metals rebound led by iron ore (+6.3%). US and UK closed today.
# China manufacturing PMI falls to 51.0 in May from51.1 in April. Input prices jump from 66.9 to 72.8, highest since 2010 and new export orders drop below 50 (contraction). Services PMI rebounds from 54.9 to 55.2.
# Week ahead: Euro CPI, RBA and OPEC+ tomorrow; Australia 1Q GDP on Wednesday; US payrolls, RBI and G7 finmins on Friday
# CFTC weekly FX positions: EUR longs climb to 14.1% of OI, JPY shorts fell to 32.7%, GBP longs rise to 18.1%, CAD longs cut to 21.0%, AUD positioning flips to net short, CHF shorts trimmed to 2.8%; UST 10y long positioning rises to 2.3% of OI
# Nikkei -1.0%, EUR 10y IRS +1bp at 0.135%, Brent crude +0.7% at $69.2/b, Gold +0.1% at $1,905/oz
Curtain falls on May – gains for the ZAR, BRL, RUB and European currencies
USDCOP Drivers Friday
GLOBAL
Stock futures rise after inflation data. The S&P500 rises 0.26% and Dow 0.44%. Government bond yields rise, with US 10yr yield on 1.611% and WTI oil prices are rising 0.94%.
In currencies, EURUSD is trading -0.39%, USDMXN 0.21%, USDBRL -0.09% and USDCOP 0.09%.
COLOMBIA
With excess demand, Bancóldex placed ‘Reactivation Bonds’ for COP 500,000 million. Bancóldex placed ‘Reactivation Bonds’ for COP 500,000 million in the Colombian capital market. In the first auction of these assets, there was an over demand of more than COP 1.2 billion, equivalent to 3.1 times the value that was initially offered. In total, the operation had the participation of 214 investors, both natural persons, legal entities and foreign investors. The titles were awarded for COP 341,000 million over a two-year term; and for a value of COP 159,000 million over three years. The entity recalled that these resources will be channelled through credit lines to finance the reactivation of Colombian companies.
Senate Committee approved the Capital Market Reform project in the first debate. Nine members of the commission voted in favour and none against. The main changes to the approved text in relation to the one that was filed by the Government have to do with the fact that the Ministry of Information Technologies and Communications will maintain surveillance of money orders and this responsibility will not be transferred to the Ministry of Finance and the Super Finance. In addition, the article that modifies the percentages of allocation to the individual savings account, administrative expenses and the disability and survivors insurance premiums of the savers of the Individual Savings Scheme with Solidarity (Rais) was eliminated. In addition, general provisions of the Corporate Regime were included that incorporate innovative elements that promote the use of electronic media and strengthen the provisions related to corporate governance criteria for entities supervised by the Financial Superintendence.
SuperFinanciera certifies that the TRM until Friday will be USDCOP 3,729.02 and it fell -0.49% or 18.46 compared to the previous one (3,747.48): the dollar closed in the spot at 3,721.71.
Notable increase of Covid-19 infections: The Health Ministry reported 25,092 new infections of covid-19 and 513 deaths from the virus. The number of recovered amounted to 3,101,390 and the number of active cases reached 120,276. Bogotá ranked first with the number of infections in a day with 9,695 cases, followed by Antioquia with 3,537, Valle with 1,679, Santander with 1,334 and Cundinamarca with 1,660.
This week in EM, we are keeping an eye on upcoming mid-term elections in Mexico, the presidential run-off elections in Peru, a monetary policy meeting in India and inflation prints in Poland and Turkey. In global markets the focus should remain on US data releases and rhetoric from Fed officials.
EMFX Quant’s Lab: Signals Supportive for High-Beta EMFX; BRL and RUB Top Choices
EMFX momentum improved further, with our model decreasing its short allocation practically to neutral (-15%); G10 FX moved to mild long. This coincides with our High-Beta Centrality measure receding again, which is related to good performance of EMFX. RUB, BRL and MXN are top choices of our models.
See EM Quant Toolkit Primer and our Curve Factor for a full explanation of our models.
EMFX allocation almost neutral after being underweight most of the year: Our directional portfolio continued decreasing its allocation to EMFX to practically neutral levels (-15%) while mildly increasing G10 FX to marginal overweight at 3.5%. Most of the improvement is explained by the equity momentum factor. Similarly to the cross-sectional portfolio, there is a preference towards European currencies.
Our High-Beta Centrality measure suggests long risky EMFX: With volatility and correlations continuing their downward trend, High-Beta Centrality decreased further, which historically suggests good performance for carry strategies and high-beta EMFX. Most of the decrease is explained by BRL and TRY (Exhibit 2).
RUB and BRL top choices: Not only did BRL and RUB exhibit one of the largest upgrades across EMFX on the back of good equity momentum, but also overall our factor allocation portfolio has both in the top three alongside MXN (Exhibit 3). TRY sentiment deteriorated, with VRP moving to short despite the currency starting to look cheap. On the other hand, the model increased its short allocation in ZAR as the currency screens ‘expensive’ vis-à-vis other EMs, although in relative terms its valuation is far from stretched.
Notes: The “buy” and “sell” signals are purely rule-based trading strategies and only serve as an input in our decision-making framework. The performance data provided in this document is a hypothetical illustration of mathematical principles; it does not predict or project the performance of an investment or investment strategy. Past performance is no guarantee of future results.
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