Natalia Gurushina, Economist, Emerging Markets Fixed Income
February 04, 2020
China continues to provide ample liquidity to calm the market and minimize the growth downside. Brazil’s industrial production surprises to the downside.
China is keeping its liquidity floodgates wide open, providing RMB500B through the central bank’s open market operations (in addition to yesterday’s RMB1.2T). The consensus also expects that both the 5-year and 1-year Loan Prime Rates will be cut on February 19 (by 7bps and 10bps respectively). China’s policy “bazooka” is clearly having a market impact—the sentiment is better this morning—even though analysts are busy revising their growth forecasts down. The market expectations of additional rate cuts elsewhere in the world are on the rise (see chart below). Some central banks are nodding in agreement (Indonesia said it is not averse to more easing), but some (Australia) are staying put, thinking that risks to the economy are temporary.
In Argentina, it’s the Province of Buenos Aires’ day of reckoning. Provincial authorities extended the deadline for creditors and added a “sweetener” in the form of a 30% amortization payment (that was due on January 26) earlier this week, but Governor Axel Kicillof said that only 50% of bondholders accepted the deal as of this morning, with one big fund blocking the deal. Governor Kicillof said that the province will start its own restructuring process, with the timeline following that of the sovereign. But it will make a debt USD250M payment with its own resources in order to avoid default after the grace period expires tomorrow.
Brazil’s industrial production disappointed in December, contracting more than expected (-1.2% year-on-year). Market participants (us included) are even more disappointed that the promised pro-growth reform agenda appears to be stalling. President Jair Bolsonaro noted today that tax reforms and the privatization of Eletrobras are still his priorities for 2020. Well, this is all good, but we would like to see more practical moves in this direction. In the meantime, the burden of supporting the growth outlook is on the central bank, with another 25bps rate cut priced in for this week.
Chart at a Glance: Market Expectations of Rate Cuts on the Rise
Source: VanEck Research; 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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Associates Corporation 666 Third Avenue New York, NY 10017800.826.2333