Deutsche Bank Markets Research Global Emerging Markets United States Economics Foreign Exchange Rates Credit Date 9 February 2018 EM Macro and Strategy Focus _Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Editors Drausio Giacomelli (+1) 212 250-7355 Jed Evans (+1) 212 250-8605 Sebastian Brown Strategist LatAm (+1) 212 250-8191 Gautam Kalani Strategist EMEA +44(20)754-57066 Juliana Lee Senior Economist +852 (2203) 8312 Guilherme Marone Strategist - LatAm (+1) 212 250-8640 Elina Ribakova Chief Economist (+44) 20 7547-1340 Christian Wietoska Strategist EMEA (+44) 20 754-52424 Economics Focus: In Asia, Indonesia, Sri Lanka and Thailand are likely to keep policy rates steady, but waiting for any sign of a shift in policy bias. In EMEA, Q4 GDP data and January inflation data for CEE3 and Israel will be in focus next week. After the above-expectations inflation print, attention in Chile will focus on the BCChs survey of economist and traders expectations to be released on Monday and Wednesday and the minutes of the last monetary policy meeting. We expect weak annual GDP growth to strengthen the case for monetary accommodation in Colombia and Peru. In Venezuela, sanction risks and political radicalization are rising after negotiations with the opposition stalled and the government unilaterally called for presidential elections on April 22nd. Strategy Focus: We see this realignment in UST premium and equity prices of limited consequence for the global economy. In addition, looking beyond short-term technical dislocations, EM inflows have little bearing on US equity positions. Reduced pass- through of wage inflation to prices points to no change in FOMC stance. FX: The fate of EM currencies hinges on continued, synchronous growth and USD weakness. This repricing of risk premium does not change macro prospects, in our view, and thus the outlook for EM FX. Take profit in spot ZAR longs and move to long-dated (9m) USDZAR digital puts. Also hold 2m digital puts in USDTRY and USDMXN. On the short side we like shekel, especially as the recent intervention data show a large pick-up in pace. After tightening stops to preserve gains on long BRL and on our longstanding recommendation short USDCOP (given that oil has some room to fall further) we stay on the sidelines for now. We also close our recommendation to sell USDPEN given the increasing risks of domestic turmoil in Peru and the decline of copper prices. Rates: We see EM driven by risk-neutral rates - not by a temporary repricing of term premium. We thus continue to position for normalization via fwd-starting IRS steepeners in TRY and CZK rates, tactical short-end receivers in PLN ahead of another low inflation print next week, 5Y5Y ILS receivers vs USD and long OFZs (Mar-33) given low sensitivity to deterioration on the external front. As the cycles come to an end in Brazil and Colombia we focus on priced normalization. Receive FRAs in Brazil Jan21|Jan23 (or even longer once volatility eases) and in Colombia (6M1Y and 1Y1Y). Keep exposure to bonds in Peru (soberanos 28s) and favor linkers over nominals in Chile (10y sector). Favor exposure to receivers in the belly in Mexico where nominal rates seem excessively high. Credit: Volatility (and market correction) may continue near term but we expect the market to eventually stabilize and inflows to return, and stay constructive on credit from fundamentals perspective. We see Argentina as oversold and look to add when vols subside (stay in RV position of long USD Pars vs. 5Y CDS). Turn more constructive on South Africa on likely Zuma exit. We see downside risk to Venezuela/PDVSA bond prices as negotiations break down, but take profit in Republic vs. PDVSA (relative pricing seems fair now). Stay underweight Mexico complex but hold switching from 4.5% 26s to 27s. Stay short Peru 50s. Best we justify this with higher core- rates in response to higher global inflation pressure, rising domestic inflation pressure and low-term premium on the IRS curve which should normalize over the curve of the year. 10Y bonds: 10Y bonds: We target 3.75% in 10Y local bonds by year-end, which implies a selloff of 20bp (based on constant maturity curves). On the spreadOn the spread, we expect an outperformance vs US-treasuries, Gilts, Bunds, Hungary and the Czech Republic, while an underperformance vs Romania. However, in contrast to most of 2017, we find the Polish market less attractive for fixed-income investors in 2018. On the cuOn the curve,rve, we favour Polgbs Jul-21, Oct-23 and Apr-28. Abstract:Abstract: Polish bonds have been the best performing local bond market in 2018 (total return in USD). Nevertheless, bonds have come under pressure over the past few weeks driven by un