The Widening Growth Gap

- Emerging Markets and the Global Economy in the Month Ahead "Fears of a double-dip recession and the risk of deflation in the US have risen appreciably in past couple of months. Although our own baseline forecast has not yet moved that far after accommodating recent economic data releases, the downside risks have clearly increased. However, we have been of the view that the main threat to EM decoupling is a credit-crunch-driven sharp growth deceleration and that EM growth (and assets) would continue to outperform otherwise. Recent asset price performance reinforces our view. Since valuations are now less compelling, however, we have narrowed long positions in selected Rates, FX and Credit markets"
- EM Rates -- The Last Drop "We examine whether EM rates have become more sensitive to global drivers and identify those curves which could still benefit from US rates falling further. While most curves would benefit under this baseline scenario, not all will fare equally under risk scenarios. We examine behavior under "double dip" and a mean-reverting "old normal" highlighting the risks in (long-end) Brazil and Turkey. On the other hand, while many of the other curves are similar in terms of exposure to USTs, individual factors lead us to favor curves where further cuts cannot be ruled out (Mexico and South Africa) or risk-adjusted carry still appears high (Poland)."
- EMFX: Protection in Risk Reversals "The combination of unusually low betas and flat risk-reversals (RRs) suggests that we could see a double-whammy of overshooting in both spot and skews should macro data deteriorate. We hence look at defensive risk-reversals in EMFX in currencies where the hedges have highest payout ratios and the currency betas retraced the most."

- Opportunities in Sovereign Credits "We remain constructive on the performance of EM sovereign credit despite our baseline scenario of lower UST yields, as we believe strong inflows will continue to more than offset the negative impact of lower UST yields on credit spreads. We also present our country-specific views on the major sovereign credits and discuss trading opportunities within each of them."

- Revisiting Financial Condition Indices in Latin America "We update our estimates of financial conditions indices in Latin America. The indices include not only real interest rates but also other financial indicators. Our findings suggest that financial conditions in Colombia and Mexico are rather loose, while those of Argentina, Brazil, Chile and Peru are closer to neutrality."

- The Local Markets Analytics Package (LMAP) Expands to Asia "Two years ago we launched our Local Markets Analytics Package (LMAP), covering six local markets in EMEA and two in Latam. We are delighted to now announce the biggest enhancement to the package, with the inclusion of ten Asian local markets, taking the total tally of markets covered to 21. In this article we present an updated guide to the LMAP, building on the original guide from 2008, but with additional material to address some of the questions we have received from readers over the past two years."

DeutscheBank Emerging Markets Monthly 20100910