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  • Emerging Markets Debt Daily

    EM Hit by Geopolitical Tensions

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    January 03, 2020

    Today’s emerging markets (EM) price action is mostly driven by a spike in geopolitical tensions. Mexico’s activity gauges weakened further in December, decoupling from the rest of EM.

    The news about a U.S. airstrike that killed a top Iranian military leader is driving the markets this morning, with rising geopolitical tensions (specifically, the nature of Iran’s retaliation) and the price of oil being main concerns. There are signs of currency interventions in several emerging markets—Indonesia (confirmed by the central bank), Chile (scheduled) and Turkey (state banks appear to be defending 6.0 TRY/USD level). Turkey’s action should be considered in a context of a bigger than expected inflation spike in December (both core and headline). And this, in turn, might lead to a pause in the rate cutting cycle. So, the Turkish central bank’s meeting on January 16 should be closely watched.

    Mexico’s activity gauges continue to move in the wrong directionclearly decoupling from EM peers (see chart below). The manufacturing Purchasing Managers Index (PMI) fell to 47.1 in December, with the new orders index reaching the lowest level since the series began. The economy enters the year with a growth outlook that is challenging at best. It remains to be seen, however, how much support it can get from the central bank. The latest minutes (released yesterday) were less dovish than expected, with inflation risks and recent wage hikes dominating the discussion.

    Argentine assets took some beating this morning following a warning from the U.S. that President Alberto Fernandez’s foreign policy could affect relations with the International Monetary Fund (IMF). The U.S. was particularly unhappy about Argentina granting asylum to Bolivian ex-president Evo Morales and relations with Venezuela. While this is not a good headline, it looks more like a negotiation technique then a change in the direction.

    Chart at a Glance: Mexico’s Manufacturing Gauge – Out of Synch
    Chart at a Glance: Mexico’s Manufacturing Gauge – Out of Synch

    Source: 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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