Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 24, 2020
We are breaking a rule this morning by not referencing the country from the first bullet point in the headline (go straight to “À propos” section if you want to know about sanctions arbitrage). The reason is that we simply ran out of all possible word combinations to describe Mexico’s lack of growth. But the country is important – so here we go. Mexico’s domestic activity missed expectations again in November, shrinking by 1.21% year-on-year and getting stuck at the bottom of a multi-year range. The reasons are mostly structural, but the central bank appears to be willing to help at the margin with gradual policy rate cuts.
Russia’s new government story got an interesting twist today. We wrote earlier about our concerns that the new cabinet is lacking people with the private sector experience. We were happy to learn that one of the old cabinet’s “exiles” with a solid private sector pedigree – former Minister of Economic Development Maxim Oreshkin – was appointed a presidential aide. This is not a bad move/sign, given the Kremlin’s role in defining Russia’s economic policy.
The global growth stabilization narrative got some support from Europe and the US today, as composite activity gauges (Markit Purchasing Managers Indices) on both sides of the Atlantic continued to rebound in January. All eyes are now on China, and the impact of the coronavirus on the world GDP. China’s internal travel ban now affects 11 cities (35 million people), prompting numerous comparisons with the SARs epidemics. Many commentators pointed out that during the SARs episode, the activity disruption was sizable but short-lived (over in a few months).
À propos: There is an interesting discussion on Twitter regarding sanctions arbitrage. Yep, you’ve heard me right. Sanctions arbitrage. The bottom line is that when multiple countries are sanctioned (by the US), there might be unintended consequencesstemming from the interplay of different sanction regimes. This is especially the case when the sanctioned countries are more plugged into the global production and financial chains than Northern Korea or Iran. Some sanctioned entities might start to cooperate and actually benefit from the situation. A fascinating topic, which is not properly researched – very tempting to have another look at my old textbooks on game theory over the weekend (just kidding). Let us know if you see any good publications on this issue – we’ll do the same.
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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