Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 27, 2020
Brazil’s current account and foreign direct investments disappointed in December. However, a sum of these two indicators (“basic balance”) stayed positive (see chart below). This means that Brazil is not only able to cover its current account gap with stable capital inflows, but is also getting extra funds to finance expansion and (hopefully) improve its growth trajectory. The widening of Brazil’s current account gap in 2019 (2.8% of GDP vs. 2.2% in 2018) reflected more stable domestic activity and lower than expected growth in Brazil’s main trade partners, including China. The coronavirus newsflow suggests that exports will continue to face headwinds in the coming months—but Brazil’sexternal vulnerability should remain low.
Mexico’s retail sales showed signs of life in November, but failed to break the downward trend. Higher real wages might have helped, but a sizable upside surprise (up 1.7% month-on-month) was most likely due to Black Friday promotions—and this means that the sustainability of the rebound remains uncertain. The market continues to price in four full rate cuts in Mexico over the next twelve months. The fundamentals (weak growth, low-ish inflation) support this view.
A wave of risk aversion hit emerging markets (EM) assets this morning. The coronavirus outbreak in China is the main culprit, with the attention shifting to growth implications—both in China and elsewhere in EM. The consensus expects that China’s activity gauges (both official and Caixin Purchasing Managers Indices) will be affected already in January. China’s main trade partners are also on the radar screen—Germany’s weaker than expected IFO survey1 signals that the growth risks remained to the downside even before the new uncertainties emerged.
Chart at a Glance: Brazil’s External Accounts – Sizable Safety Cushion
Source: Bloomberg LP
1The Ifo Business Climate Survey is a leading indicator of German economic activity, compiled by the Munich-based Ifo Institute for Economic Research.
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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