Emerging Markets Debt Daily
China Contagion vs EM Policy BreakthroughsNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 27, 2021
China’s sell off continued this morning, but the newsflow in other EM was more encouraging. Which one will prevail?
China contagion concerns dominate this morning, following another big drop in the CSI 300 equity index1 and the fact that China’s government bonds sold off (yields widened) in unison with equities (see chart below) instead of acting as a “safe haven” asset. Against this backdrop, the upcoming release of China’s activity gauges (PMIs) would be of utmost importance because of their potential to reinforce or undermine China’s 2021 growth story. The consensus forecast for 2021 GDP growth is still unchanged at 8.5%, despite tighter regulations in real estate and the tech sectors, and new mobility restrictions/virus outbreaks. Weaker than expected PMIs could become the proverbial straw that broke the camel’s back.
The China daily newsflow contrasts with the rest of emerging markets (EM), where we see more evidence of orthodox policies in action. Hungary’s central bank delivered a hawkish surprise this morning, raising its benchmark rate by more than expected in an attempt to keep inflation pressures under control. This is the second consecutive rate hike, and central bank officials made it very clear that their policies have to be proactive in order to bring annual inflation from >5% back to the 3% target.
Across the globe, South Africa’s public sector unions agreed to the government’s wage increase proposal that was already budgeted. This is very good news, given that the recent deadly riots led to the extension of fiscal support. We watch South Africa’s developments with interest because the riots opened the door for political changes - especially as regards the balance of forces inside the ANC and between the ANC and other political actors. Moving away from the ANC infighting and improving South Africa’s fiscal and growth trajectories would be a real game-changer (both for equities and bonds). Stay tuned!
Charts at a Glance: China Government Bonds Feeling the Tech Rout’s Heat
Source: Bloomberg LP
1The CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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