Russia’s political reshuffling: Finance Minister Kudrin dismissed. The situation with Finance Minister Kudrin expressing intention to leave his position after the March 2012 presidential elections under a (future) PM Medvedev has developed quickly. Yesterday President Medvedev demanded that Mr Kudrin resigns or reconsiders his position. This was followed by a dismissal shortly after (the President’s press attache stated that the President had signed a dismissal request submitted by PM Putin). This, in our view, is a negative for markets, as Mr Kudrin is broadly viewed as the key person behind the prudent fiscal policy in Russia since the 1998 default and one of the few remaining liberals in the government. Also, the dissent between the two politicians, which surfaced after Mr Medvedev’s “nomination” for the PM position in a potential new cabinet, indicates that other internal conflicts may emerge in the ruling elite in the coming months. However, we do not believe the dismissal will have serious fiscal implications at this stage, unless the United Russia’s party performance in the 4 December parliamentary elections deteriorates, triggering a round of additional populist spending initiatives.
Israel – BOI cuts rates by 25bp. The BoI reduced its policy rate 25bp to 3.0%. The rate cut follows 3 months of holding rates unchanged, after having increased rates 275bp during August 2009 to May 2011 (ten different rate hikes in total, all except one were 25bp). We and the consensus had thought there would be no rate cut this month. The logic for the cut reflects improvement in inflation prospects and deterioration of growth prospects. The BOI states that global growth is worse than it previously expected and the deteriorating global economy is threatening Israel’s growth. In addition, the BOI views Israel inflation as well behaved. Even though at 3.4% y/y it is above the 1-3% inflation target, both the BOI and markets now expect inflation to decline over the next 12 months to near the middle of the target range.There is no indication whether this is a one time rate cut or the beginning of a rate cutting cycle. This issue could be complicated by the impending move to a rate committee from the present system where Governor Fischer makes the decision on his own, with advice from BoI staff. Strategy implications: Given the surprise rate cut, following the market instability over the past weeks, we do not think this is the time for ILS longs and turn increasingly cautious on the ILS. In rate space, however, the rate cut could should support our recommendations to receive 5y IRS and to be long 10y BE inflation.
The possibility of earlier rate cuts than we (and the market) anticipate in some countries was a topic we highlighted in our latest EM Flows snapshot, published last Friday night and we reiterated our recommendation to remain constructively engaged particuarly at the short-end of EM local curves – FX hedged where appropriate. However, we also highlighted that the negative YTD performance of EM local bonds heightens the risk of a negative feedback loop for flows. This is how the YTD performance versus flows picture looks like for EM equities:
Flows to EM dedicated equity funds versus MSCI EM performance:
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