Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 18, 2020
Markets failed to react as expected to major policy announcements in the U.S. and across the globe. China’s daily coal burn points to post-coronavirus recovery.
The U.S. Federal Reserve’s (Fed’s) decision to resurrect its Primary Dealer Credit Facility1and Commercial Paper Funding Facility2was supposed to be a game-changer, but it failed to calm financial markets. This is despite the fact that both facilities will be addressing major pressure points: (1) liquidity concerns in credit markets; and (2) banks’ ability to act as middlemen. Policy-wise, everything is on the table right now. In particular, getting the Fed’s commitment to buy corporate credit is considered an essential condition to overcome the financial market shock. Big-number policy announcements, however, appear to have a side effect. The massive fiscal stimulus in the U.S. (additional USD1.2T) and across the globe is driving expectations of a significant government bond supply, which in turn pushes yields higher especially at the longer end of the curve—but this curve-steepening is not reflective of improving growth expectations.
We continue to get more evidence that the Chinese economy is recovering from the coronavirus-related collapse. A report by Bloomberg Intelligence reported a 47% increase in daily coal burn in China’s six major coastal power plants between February 10 and March 16 (see chart below). It also mentioned a 70%+ work resumption rate in Guangdong, Shanghai and Shandong. There are legitimate concerns that China’s recovery will be affected by much weaker growth in its major export markets. At the same time, China’s growth model increasingly relies on consumption these days, which makes it more inward-looking, giving authorities more room to stimulate domestically.
In the past several days, the International Monetary Fund (IMF) announced a number of initiatives—including USD50B in the rapid-disburse emergency funds—to shield emerging and low-income economies from the negative impact of the coronavirus. Some countries, however, will not be getting access to the money. Venezuela is among them, and the reasons for denying its formal request for USD5B are political. The IMF made it very clear that it cannot lend to a country whose government was not recognized by the international community.
Chart at a Glance: China’s Green Shoots Are Back
Source: 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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