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  • Emerging Markets Debt Daily

    Race to the Bottom Speeds Up

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    February 05, 2020

    Emerging markets central banks are rushing to cut rates to mitigate the coronavirus risks. Argentine assets rally on averted default in Province of Buenos Aires.

    A race to the bottom in emerging markets rates is gaining pace. Thailand surprised with a 25bps cut, Brazil is expected to do the same after the market close and the Philippines is likely to make a similar move tomorrow (despite January’s upside inflation surprise). Indonesia indicated that it is not averse to more cuts and is likely to do it after a downside surprise in Q4 GDP. The Thai rate cut was unanimous, with board members anticipating a “substantial” impact on the economy (including tourism) from the coronavirus—a weaker currency would be an icing on the cake for monetary authorities. It’s probably worth mentioning that Poland’s central bank reconfirmed its “perma-dovish” stance today—but we’d be shocked if it wouldn’t.

    Argentine assets continued to party rally this morning after the Province of Buenos Aires averted default at the last moment. The next important development to watch is the IMF’s visit to Buenos Aires (technical mission). Minister of Economy Martín Guzman just met with the IMF Managing Director Kristalina Georgieva and said in a subsequent interview that the country would require more time to repay the IMF debt. Meanwhile, the government is busy re-profiling its near-term debt repayments—it just swapped approximately 10% of Dual Bonds 2020 maturing on February 13 into longer-dated securities, with another swap planned for February 11.

    The U.S. relative outperformance narrative got big support this morning. A massive upside surprise in the U.S.’ ADP Employment change (291K in January) contrasted sharply with the Eurozone’s underwhelming retail sales print. It is hardly surprising that the expected growth differential between the two economies is grinding wider (see chart below), while the U.S. dollar just got another macro boost.

    Chart at a Glance: U.S.-Europe Growth Differential – No Signs of Correction

    Chart at a Glance:  U.S.-Europe Growth Differential – No Signs of Correction

    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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