Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 04, 2020
Turkey’s policy mistakes are back in the spotlight, following a huge spike in overnight rates. Argentina reached a deal with three major creditor groups.
Today’s Turkey comment was supposed to be about inflation (which moderated more than expected in July). Instead, analysts are transfixed by the developments on Turkey’s currency market. The central bank’s currency and liquidity “management” led to a massive spike in forward points, with the overnight forward-implied yield surging to mind-blowing 1024% (see chart below). The Turkish economy does have fundamental strengths, but a series of major mishaps on the monetary and exchange rate fronts pushed it to the bottom of EM rankings in several key metrics – especially those that involve the international reserves. The market started to price in near-term rate hikes in Turkey – and today’s developments show that it has good reasons.
Argentina’s debt restructuring uncertainty is over. The government announced that it had reached a deal with three main creditor groups. Authorities addressed legal concerns of creditors to align the deal with international restructuring standards (a key outstanding demand) and brought forward some payments, boosting bonds’ net present value. As one would expect, the market reaction was very positive (bondholders still have to officially approve the deal). Once the initial euphoria fades away, the market will increasingly focus on the government’s ability to fix the post-COVID economy, including a potential new engagement with the IMF.
Brazil’s industrial production continued to recover in June. The yearly growth was still negative (-9%), but the trend is up. The latest activity gauge (Purchasing Managers Index) looked very good, suggesting that the rebound has legs. The improvement notwithstanding, the market continues to think that the central bank will deliver one more rate cut this year, as downside growth risks are abound, and inflation remains close to historic lows. We hope, however, that the rebound will also allow the government to focus more on structural issues, such as tax reform.
Chart at a Glance: Massive Surge in Turkey Overnight Rates
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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