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Emerging Markets Daily - March 10
Return of Lula Shakes Brazil, China and the Commodity Super-cycle, India CB Tightening?, Sanctions on Israel Mining Tycoon in DRC, and China Bans "Stock Market" Search on Social Media
The Top 5 Emerging Markets Stories - March 10
Brazilian Politics, Markets to Be Shaken by the Return of Lula
“Luiz Inácio Lula da Silva first ran for president in 1989. Three decades later, the gravelly-voiced former union leader looks set for one more run at Brazil’s top job after a Supreme Court judge quashed his convictions and restored his political rights.”
“His resurrection from the political ashes sets the stage for a déjà-vu election next year, pitting him against far-right President Jair Bolsonaro and giving voters a choice between the most polarizing figures on Brazil’s political spectrum.”
“‘This changes the whole picture,’ said Creomar de Souza, founder of Dharma Political Risk and Strategy in Brasilia. ‘It’s obviously still very early, but this strangles any momentum for a more moderate centrist candidate.’ That should suit Bolsonaro just fine.”
“The former army captain won in 2018 with vows to expunge the leftist legacy of Lula’s Workers Party, which led Latin America’s largest economy from 2003 to 2016. Bolsonaro’s rhetoric was simple, angry and very effective: The left was rushing Brazil on a one-way street to the same ruin as Venezuela, he warned. Politics in the capital Brasilia was rotten to the core. The country needed an unvarnished right-wing outsider like himself, with no links to major political parties.”
“But as former U.S. President Donald Trump’s failed re-election effort showed, it is harder to win on a drain-the-swamp platform when you’ve spent four years in charge of the swamp.”
“‘Bolsonaro today doesn’t have much to show for his presidency,’ said Leonardo Barreto, director at political consultancy Vector in Brasilia. ‘The government has to show results to keep Bolsonaro in power. This is more important than the presence or absence of Lula in the presidential race.’”
“For Barreto and many other political analysts, that means Bolsonaro may pursue an increasingly populist agenda to shore up support. Promises of economic reforms, which won Bolsonaro supporters from the financial community, will be shelved.”
Financial markets reacted to the prospect of a further populist shift. Brazil’s real, already the world’s worst-performing currency against the dollar this year after the Libyan dinar and Sudanese pound, slumped to within 10 cents of its all-time low in May last year.” Reuters reports.
Commodities Supercycle? China’s Numbers Don’t Support View
“A warning shot has been fired across the bow of proponents of the view that commodities are entering a new super-cycle: China’s imports of crude oil, iron ore, copper and coal in the first two month of the year look far from bullish.”
“China is the world’s largest importer of all these major commodities. It’s also dominant in the two – iron ore and copper – that are perhaps the most important for backers of the theory that efforts to decarbonise the global economy mean the dawning of a new era of rising prices.”
“On the face of it, China’s imports of major commodities in January and February appear to show some growth, especially in year-on-year terms. But breaking them down reveals signs that the appetite of the world’s second-largest economy for natural resources may be waning slightly.”
“Iron ore imports in the first two months were 181.5 million tonnes, up a reasonable 2.8% from the same period last year, according to official customs data released on March 7. China customs doesn’t provide separate figures for January and February, combining the two months in a move that may serve to smooth out the data given the variable timing of the Lunar New Year holidays during the period.”
“Iron ore’s modest year-on-year gains start to look less impressive when compared to the preceding months.” Hellenic Shipping News reports.
India Central Bank Headed for Tightening?
“The global economic recovery is fueling speculation central banks will soon be shifting into tightening mode -- nowhere more so than India. Five-year interest-rate swaps jumped 63 basis points in February, the biggest advance since the 2013 taper tantrum, reflecting growing expectations of a tighter monetary policy.”
“Swap rates signal India will see the most rapid tightening of any nation in Asia, according to Standard Chartered Plc. Fears of a resurgence in inflation driven by rising oil prices is adding to the speculation.”
“‘The market is swept up by high intensity global reflation trade,’ said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. in Mumbai. ‘Within this, India’s sensitivity to crude oil prices as well as the V-shaped rebound in economic activity may be creating divergent expectations of the monetary policy path ahead.’”
“Rate-hike wagers are building around the world as optimism over an economic rebound is complicated by concern that inflation is quickening following an unprecedented period of rock-bottom borrowing costs. In India’s case, this is posing a thorny challenge for central bank Governor Shaktikanta Das, who has vowed to keep monetary policy accommodative as long as necessary to support the recovery.” Business Standard reports.
Biden Restores Sanctions on Israeli Tycoon on DRC Corruption Charges
“President Joe Biden’s administration will reverse a temporary sanctions reprieve on billionaire Israeli mining tycoon Dan Gertler over allegedly corrupt mining and oil deals in the Democratic Republic of Congo.”
“The Treasury and the State Department will revoke the sanctions waiver issued in the final days of the Trump administration, the departments said in a joint statement on Monday. The temporary reprieve issued five days before Trump left office in January 2021 was ‘inconsistent with America’s strong foreign policy interests… including U.S efforts to counter corruption and promote stability in the Democratic Republic of Congo,’ the statement said.”
“‘As the original designation of Mr Gertler under the Global Magnitsky sanctions program in 2017 and subsequent designations in 2018 made clear, Mr. Gertler engaged in extensive public corruption,’ they said.”
“Dan Gertler was slapped with US sanctions in 2017 for allegedly profiting from ‘opaque and corrupt oil deals’ made possible by his intimate friendship with former DRC strongman President Joseph Kabila. The US government stated that ‘between 2010 and 2012 alone, the DRC reportedly lost over $1.36 billion in revenues from the underpricing of mining assets that were sold to offshore companies linked to Gentler.’ Gertler denies all wrongdoing.”
“However, in January 2021, President Donald Trump eased the sanctions. Under a new licence, US institutions were allowed to lift asset freezes and transact with Gertler and his sanctioned entities for at least a year. No reason was given for the decision, which bypassed a normally rigorous review process.”
“Meanwhile, hopes are rising that Congo’s mining sector, marred by allegations of decades of corruption is turning the corner. In recent weeks, President Felix Tshisekedi has neutralised the influence of former President Kabila on government.”
“Kabila’s dysfunctional 18 years rule ended in January 2019, but he continued to wield power through his People’s Party for Reconstruction and Democracy (PPRD), which controlled around two-thirds of seats in the national assembly and senate.”
“However, a major political shakeup in February has weakened Kabila’s grip on the government. President Tshisekedi has fought hard to sideline his predecessor and former ally, threatening Kabila’s supporters with corruption proceedings unless they switch their allegiance. The efforts appear to be working – 400 out of 500 legislators in the National Assembly are now thought to be allies of the incumbent.” African Business reports.
China Seemingly Bans “Stock Market” Search on Social Media
“China’s stock rout turned so extreme that state-backed funds intervened to calm the market on Tuesday, but authorities appeared to make it somewhat difficult to find out what happened on the mainland.”
“On Weibo, the Twitter-like platform with about half a billion active users, a search for Chinese equivalent of ‘stock market’ generated no posts on its web version on Wednesday, suggesting the phrase had been censored. Users could still post using the term, and the mobile version showed some results if hashtags weren’t included. Searches for words that mean ‘plunge,’ ‘A-shares’ and ‘stocks’ were successful in the morning.”
“The Chinese government’s limits on search results came during the annual session of the National People’s Congress, the biggest political event of the year. An article in the Shanghai Securities News, one of China’s most widely circulated financial dailies, said large insurers bought stocks on Tuesday. The report also denied recent ‘rumors’ that insurers had made large-scale redemptions of stock funds, citing investment managers at companies in the sector.” Bloomberg reports.