Emerging markets week ahead

Emerging markets saw the largest weekly decline since November last week on softer than expected economic news out of China and a political impasse in Greece that could result in the country leaving the European Union.

Image courtesy Gepsimos: http://commons.wikimedia.org/wiki/File:Papoulias.JPG

Greek president Dr. Karolos Papoulias

The iShares MSCI Emerging Markets Index (EEM, quote) fell 3.4% last week against a decline of 0.8% in the S&P 500. The emerging markets index is now off 10.7% from its high this year on March 1st, the day before the government of China cut its GDP outlook to 7.5% for the year.

China’s 50 basis point (0.5%) cut in its bank reserve requirements over the weekend may provide some support to the market, though investors will still face considerable uncertainty from European headlines.

Greek President Papoulias was given the task of brokering a unity government after the heads of the three leading parties failed to do so. It had appeared Friday that PASOK party head Evangelos Venizelos would be able to head a coalition after positive talks with the Democratic Left but plans eventually failed due to a requirement that the Syriza party participate as well. Comments by the heads of the Syriza and Democratic Left over the weekend suggest a break between the two groups and still a possibility that a unity government can be formed without Syriza’s blessing.

Monday, May 14

Wholesale prices in India probably slowed to around 6.7% from 6.9% reported the month before. While still above the central bank’s target of around 5%, the rate of price increases is well off its highs of 9.5% through most of 2010 and 2011. While most price pressure is coming down, inflation in food costs is still stubbornly high at around 8.5%. This is a common theme across many emerging markets evidenced by a Chinese CPI report last week that showed moderation to around 3.4% overall but food prices increasing by 7% on an annualized basis. The central bank of India cut rates for the first time in three years to 8.0% in April but will have a difficult time cutting further unless inflation comes down to target.

Mexican industrial production most likely slowed in March along with data in the United States that showed some weakening in the economic rebound. Industrial production quickened to its fasted pace in almost a year with a 5.9% annualized increase in February but will probably slow to an increase of around 3.0% in March. Auto production in March increased 9% and production at state-owned PEMEX came out higher than expectations but weakness in other sectors is acting as a drag on overall production.

Reporting earnings on Monday are China Yuchai Intl (CYD, quote) and RenRen Inc (RENN, quote).

Tuesday, May 15

Reporting earnings on Tuesday are China New Borun (BORN, quote), Yingli Green Energy (YGE, quote), Sina Corp (SINA, quote), and Soufun Holdings (SFUN, quote).

Wednesday, May 16

A high budget deficit and heavy reliance on oil may threaten Malaysia’s credit rating this year. The country reports GDP on Wednesday with expectations for growth slowing to under 5.0% from last quarter’s pace of 5.2% on a year-over-year basis. Despite a weak fiscal picture, much of the debt is held by domestic investors and consumption is still fairly strong.

Reporting earnings on Wednesday are 21Vianet Group (VNET, quote) and CTRIP.com (CTRP, quote).

Thursday, May 17

Inflationary risks will have the Central Bank of Chile maintaining its overnight rate at 5.0% on Thursday. Though pricing pressures have come down to around 3.5%, within the 2-4% target by the bank, pressures from the regional drought may lead to higher food inflation. Expectations are for healthy GDP growth of 4-5% over the year, down from 6% last year and lower than growth in regional neighbors like Peru and Colombia.

Reporting earnings on Thursday is E-commerce China DangDang (DANG, quote).

Friday, May 18

Brazil’s economic activity index most likely increased to 2.3% from 0.9% in the previous month. Aggressive monetary and fiscal policies appear to be working themselves through the economy after falling in the second half of last year. Expectations are for full year growth of around 3.2% and inflation of 5.5%, under the central bank’s target range of 4.5% +/- two percent.