By Natalia Gurushina, Economist, Emerging Markets Fixed Income for VanEck Global
Merry Christmas and Happy Hanukkah! May you all experience your own Festivus miracle!
China surprises the market with a conservative decision to keep its key policy rates unchanged. A sharp correction of Argentina’s current account deficit and the re-profiling of U.S. dollar-denominated local bills strengthens the external backdrop during the debt restructuring talks.
The year is ending on a high note—with strong inflows to emerging markets (EM) dedicated funds and more optimism about the growth outlook, which includes an upward revision of China’s consensus gross domestic product (GDP) forecast for 2020. The latter gives Chinese authorities more time to evaluate the impact of past policy initiatives. And this might help to explain the central bank’s decision to keep both 1-year and 5-year Loan Prime Rates unchanged—against the market expectation of the 1-year rate cut. China’s overall policy stance remains accommodative, but the reasons behind high funding costs for private companies are largely structural. A succession of rate cuts might ease the situation at the margin, but a meaningful improvement requires a more concerted reform drive.
Mexico’s central bank reaffirmed its conservative reputation yesterday, opting for a measured 25bps policy rate cut. Mexico’s inflation is gradually crawling down, economic slack is getting wider (check today’s disappointing retail sales print), but the board has a long list of uncertainties (including Pemex ratings, the minimum wage hike and regional spillovers) that warrants caution. The market thinks that the central bank will remain “on autopilot” for now, delivering four or five full rate cuts over the next year.
A sharp correction of Argentina’s current account balance (see chart below) is a big positive for the country’s external position while it remains locked out of international capital markets. The deficit narrowed to USD1.05B in Q3—more than expected—driven by smaller imports and recovering agricultural exports that reflected the large currency depreciation and a better harvest. And the high-frequency data (trade balance) points to further improvements in Q4. As regards currency flows, another notable development was the re-profiling of local Treasury bills denominated in U.S. dollars (Letes). This allows the government to delay USD9B of debt payments until August 2020, giving it a bit more room for honoring sovereign liabilities while it conducts negotiations with debt holders.
Chart at a Glance: Argentina’s Current Account Correction Continued in Q3
Source: VanEck Research; 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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