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  • Emerging Markets Debt Daily

    China’s Generous Pour of Liquidity

    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

    Chart at a Glance: Market Expectations of Rate Cuts on the Rise

    Source: VanEck Research; Bloomberg LP


    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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