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  • Emerging Markets Debt Daily

    Next Stop ‒ Open-Ended QE

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    March 23, 2020

    Central banks continue to line up emergency responses, with the U.S. Federal Reserve announcing unlimited QE. China’s domestic activity shows further signs of stabilization.

    Emerging markets (EM) central banks and governments continue to line up emergency responses, including many unconventional measures. Mexico and Thailand surprised with rate cuts on Friday (25bps and 50bps, respectively). Brazil’s central bank lowered the reserve requirements for banks. The Philippine central bank pledged to buy government securities. In Israel, the central bank promised to purchase ILS50B of government bonds. And India’s reserve bank announced additional sizable OMO (open market operations) bond buybacks and LTROs (long-term refinancing operations). The sense of urgency is undeniable, albeit we believe the impact on the real economy will be delayed due to movement restrictions and quarantines.

    The policy move of the day took place in the U.S., where the U.S. Federal Reserve (Fed) announced an open-ended quantitative easing (QE) program, which includes unlimited purchases of government-backed securities. The Fed also pledged to buy corporate bonds in the primary and secondary markets and support muni lenders. Finally, the Fed brought back TALF (Term Asset-Backed Securities Loan Facility) and announced a new facility called Main Street Business Lending Program to encourage loans to small businesses and households. This is a major development, but the market would like to see more certainty on the U.S. fiscal package.

    We continue to get more evidence that China’s domestic activity is stabilizing. The latest numbers came via South Korea’s trade balance, which showed a sharp improvement in daily exports to China. The growth is still negative (-4.9% year-on-year), but this is much better than February’s stats (-22.2% year-on-year). Looking forward, secondary infections and the deteriorating global growth outlook pose risks, but China’s activity trajectory signals that a sharp recovery is a plausible scenario provided it is backed up by proper virus containment measures.


    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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