Fragile EuroZone conditions provide better prospects for China

After long lasting Greece turmoil institutional investors have been little cautious on euro zone and seemed to have shifted their focus on Ems. China has been one among targeted destination. The PBoC's policy measures should support the Chinese property sector. Greece induced volatility could create buying opportunities in emerging markets.

The sharp fall in Chinese equity markets is likely to feed further concerns about the state of the Chinese economy. We recommend selling Malaysia 5y CDS, given likely favorable positioning and the unexpected rating outlook upgrade.

If market perceptions increase that the Chinese authorities' control of the situation is slipping, this could have very adverse consequences for EM assets, particularly for those that are linked to Chinese demand, e.g., via commodities.

Against this backdrop, the PBoC delivered a 25 bps benchmark rate cut, combined with targeted RRR cuts, which exceeded market expectations and which we believe should help stabilize sentiment and growth, consistent with our baseline scenario of 6.8% GDP growth for 2015.

This kind interpretation of China's prospects seems pivotal for EM to eventually benefit from the global growth recovery we expect in H2 of 2015.