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  • Emerging Markets Debt Daily

    Lesson From Selloff – EM Is Not A Monolith

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    February 26, 2021

    Yesterday’s EM rates and currency selloff was not completely indiscriminate – South Africa was hit much harder than “safer” credits such as China.

    There is some pullback in U.S Treasuries after yesterday’s carnage, and the focus now shifts to the forthcoming meetings of the European Central Bank (ECB) and the U.S. Federal Reserve (Fed). The USD overnight index swap (OIS) curve now prices in the first Fed rate hike in 2 years―a big shift in expectations compared to one month ago (see chart below). So, it would be interesting to see how the Fed reacts to this discrepancy with their (seemingly more dovish) policy stance. Going back to emerging markets (EM), one observation regarding yesterday’s selloff in the EM FX and rates space is that it was not completely indiscriminate. Among the majors, South Africa was the hardest hit―which is not too surprising given tight valuations and multiple concerns about macro (growth, fiscal) and government policies. By contrast, China’s rates and currency were rock solid.

    The latest data releases in Turkey signal that the past rate hikes are indeed having a positive impact on the external balance. Even though exports are still range-bound, imports are finally declining (down by 5.9% year-on-year in January)―in tandem with softer credit expansion. As a result, the trade deficit narrowed to USD3.03B and is no longer deteriorating. There is still a long way to go, and retaining a hawkish tone is key for the central bank’s credibility in the current environment.

    Brazil’s gross government debt is creeping up (to 89.72% of GDP in January), and this explains why the market reacts so acutely to the newsflow regarding the emergency aid bill (especially approving the additional spending separately from the compensatory measures). The market seems to be in a somewhat panicky mode right now―pricing in 540bps of rate hikes in Brazil over the next 12 months. No doubt, the U.S. bond rout helped to push the expectations higher, but it is local policy uncertainty that remains the key driver.

    Charts at a Glance: A Big Shift in Expectations for U.S. Federal Reserve Rates

    Charts at a Glance: A Big Shift in Expectations for U.S. Federal Reserve Rates

    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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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