Fed, non-residents, equities
Non-residents equity purchases picked up in May, but then they gained momentum after the second elections. That, obviously, coincided with the Fed reversing course. Fixed income didn’t move much. The sell-off isn’t as bad as it was in May, but that’s it.
The netted-off figures fluctuate, but they are mostly positive for equities recently.
Holdings are very low for bonds, not as low as in May, but much lower compared to January. For equities, 65 percent in late June is the second highest monthly in 2019.
As VIX EM and VIX approach each other, good news for EMs is likely to continue for a couple of months more. As such, equities could be the main venue here, but then equity holdings are small compared to bonds. Fed downsizing-cumeasing will have a sizeable impact though.
However, relying on this climate to go deep into the rate cutting zone may be counter-productive. I take it for granted though that until late September there won’t be any problem as regards TRY stability.
I frankly don’t know how this is (was) possible, but all of a sudden, risks were downplayed. The only explanation is the expected fall in inflation, and the expected (accompanying) initiation of a rate cutting sequence, barring any political or otherwise exogenous risk.
Well, risks pile up, but the result is the same although 425 basis points cut is a bit too steep.
The behavior of residents vis-à-vis dollarization will be decisive in the coming months. If TRY deposit rate cuts stop short of break-even, fine. Otherwise, dollarization may pick up again.
Outlook. Opportunity for equities, neutral for bonds, question mark for residents’ FX/TRY trade-offs. Calm until the end of the summer.