Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 06, 2020
Chinese equities surged on the back of supportive activity gauges and the state media editorials. Argentina revealed its latest debt restructuring proposal.
“Chinese stocks on a tear” is the most widely used phrase to describe what happened this morning. The benchmark Shanghai Composite Index surged by 5.7% in the morning trade. Supportive editorials in the state media are considered the rally’s catalyst, but the latest activity gauges were also encouraging (the Caixin services Purchasing Managers Index jumped to 58.4 in June) and it looks like Beijing’s second COVID wave was contained. The developments on China’s equity market might have wider asset class implications, including the Chinese currency. The latter often acts as the bellwether for EM FX as a whole.
Argentina announced its latest offer to creditors. The proposal was an improvement, bringing it very close to agreement with one large creditor group (albeit not others). This likely means progress, but not a complete solution. As such, this is likely not the last update on debt negotiations. Still, the overall picture is of a government moving closer to creditors. The government’s latest offer; for example, recognizes accrued interest, has lower haircuts on coupons and principal, and other concessions.
Russia’s Ministry of Finance is already saying that it plans to cut borrowing after the COVID’s issuance boost. Statements like this help to cement Russia’s “fiscally prudent” reputation in the world that sees the explosion of budget deficits. The intention to (modestly) increase the income tax rate for the top bracket points in the same direction. The consensus thinks Russia’s 2021 fiscal gap will be the second smallest among major emerging markets (see chart below). Not at all surprising.
Chart at a Glance: Consensus Continues to See Sizable Fiscal Gaps in 2021
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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