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Emerging Markets Debt Daily
EM – Riding U.S. “Blue Wave”?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJanuary 05, 2021
The consensus sees EM benefitting from the U.S. “Blue Wave”. China moves to extend the favored loan policy for small businesses.
The U.S. politics is dominating headlines this morning, and the consensus view is that the Blue Wave should generally be beneficial for Emerging Markets (EM). However, EM price action this morning looks more nuanced. Local developments are the main drivers in Brazil and South Africa, causing the respective currencies to underperform peers by a wide margin. The pandemic’s second wave and new mobility restrictions are the main concern in these countries – especially against the backdrop of the largest fiscal deficits in EM (expected at around 15% of GDP in 2020). President Jair Bolsonaro’s comment that “Brazil is broken” was not helpful either. Bottom line – EM is not a monolith, so pay attention to domestic factors.
China’s decision to extend the favored loan policy for small and medium-size companies (SMEs) for several more months is a welcome move. The latest activity gauges indicate that SMEs are yet to get back on their feet. The official PMI for small companies slipped back into contractionary zone in December, indicating that it is too early to withdraw targeted support.
Today’s big jump in U.S. rates and rising market-based inflation expectations in DM create a fertile ground for inflation concerns in EM. We do see risks associated with higher commodity prices (especially food), regulated tariffs, and minimum wages. However, the chart below shows that inflation levels in most EMs are still fairly low by historic standards. And this means that rate hikes are not imminent (with some notable exceptions) - even with higher prices.
Chart at a Glance: EM Inflation – Mostly Low Compared to Recent History
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.
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