Emerging Markets Debt Daily
Surging Commodity Prices – Friend or Foe?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 10, 2021
Surging commodity prices can create a strong tailwind for EM FX. Pay attention to country specifics as regards the impact of higher food prices on EM inflation.
The world is firmly fixated on surging commodity prices these days – what are the implications for Emerging Markets (EM)? One of the most obvious dislocations is in the EM FX space – the long-term chart below shows that the gap between commodity prices and EM currencies is unusually large. There are various theories bouncing around, including the recent underperformance of several major EM currencies (such as the Russian ruble or the Brazilian real) – for purely idiosyncratic reasons (like politics or geopolitics - some of which are on the way out). Another factor that it mentioned quite often is the pandemic-related narrowing of the EM-Developed Markets (DM) growth differential - the counter-argument here is the increasing pace of vaccinations in EM. We think that higher commodity prices are a powerful tailwind for EM FX, and we explore this issue in greater detail in the forthcoming monthly commentary. Stay tuned!
Higher commodity prices also draw attention to potential inflation pressures in EM. This especially applies to food prices, and this is where we feel compelled to say our mantra - EM Is Not A Monolith. There is a lot of divergence among food price trends in individual countries. The recent annual food price increases in Russia, Brazil and South Africa are nearing 2 standard deviations relative to 3-year history. By contrast, food prices in China, Thailand, Hungary, and Romania are down a lot on an annual basis. And this means that central banks and governments across EM are facing very different challenges – with ensuing implications for local debt markets.
Charts at a Glance: EM FX and Commodity Prices – Is Current Gap Justified
Source: Bloomberg LP
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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