Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 18, 2020
China’s central bank warns about the timely withdrawal of the monetary stimulus. One day before the deadline, Argentina still has no deal with international bondholders.
Concerns about COVID’s second wave notwithstanding, China is already thinking about the “timely” stimulus withdrawal. The Governor of the central bank (PBoC), Yi Gang, made it very clear in his morning comments that authorities should consider the withdrawal in advance in order to avoid the policy “hangover”. Gang’s remarks do not imply that the stimulus will be gone overnight. In fact, the PBoC just cut the 14-day reverse repo rate by 20bps. The emphasis on lower interest rates is also here to stay—even at the expense of banks’ profits. This especially applies to lending for small and privately-owned companies. However, it looks like the overall pace of easing might be about to slow and the stimulus might become more targeted.
The rest of emerging markets (EM) are still mostly in the dovish mode—Braziland Indonesia just cut their benchmark rates by 75bps and 25bps respectively. Both central banks left room for additional easing, albeit the circumstances—and implications for asset prices—are different. Indonesia’s very high real policy rate (adjusted by both trailing and expected inflation) provides a good safety cushion for the currency and local bonds, and leaves plenty of room for more rate cuts. By contrast, Brazil’s real policy rate just turned negative (see chart below), and the currency clearly does not appreciate a prospect of additional easing—especially against the backdrop of persistent political noise. The real continued to sell off this morning (down by 220bps as of 9:40am ET, according to Bloomberg LP), so the monthly gains are pretty much wiped out.
Argentina’s negotiations with debt holders appear to have stalled. Just one day before the expiration of the current offer, the government issued a statement yesterday saying that no agreement had been reached. The government reiterated that this is their final proposal. Investors appear to be in fighting mode. The difference between the two approaches, however, is not that big—so there is still a chance of reaching a deal fairly soon. Such brinksmanship is not uncommon in such situations, and has been already in the current negotiations.
Chart at a Glance:Real Policy Rate in EM – A Lot Of Divergence
Source: Bloomberg LP
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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