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  • Emerging Markets Debt Daily

    Brazil Pension Reform Concerns Dissipate

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 08, 2019

    Brazil’s concerns about the senate’s final vote on pension reform are dissipating. U.S.-China trade tensions back in the spotlight, but the latest Caixin services PMI points to solid domestic demand.

    The Brazilian real is feeling better this morning as concerns about the senatorial delay of the pension bill vote are dissipating and Minister of Economy Paulo Guedes dismissed reports about his departure from the cabinet. The key thing to remember is that there should not be any additional dilution of the pension bill between now and the second vote, so hopefully the situation will get resolved by the end of the month and authorities would be free to move to the next stage of pro-growth structural reform—the new tax bill.

    The U.S.-China trade tensions are back in the spotlight following the U.S. decision to add 28 Chinese companies to the Entity List1 and reports that the U.S. might move forward with restrictions on government pension funds’ investments in Chinese equities. The level of political noise is likely to remain high in the run up to the next round of trade talks on October 10-11. In the meantime, we keep our eyes on China’s macro. The latest Caixin services PMI (Purchasing Managers' Index) undershot consensus, but stayed well in expansion zone, with gauges for employment/new business looking stronger in September. The next batch of money and credit aggregates should be released shortly, giving us more color on the efficacy and the direction of monetary policy.

    The incoming numbers show that emerging markets are working hard to rebuild their international reserves. Russia’s progress looks particularly impressive—the central bank’s “war chest” reached USD530.9B in September, fully retracing all losses associated with the Ukraine crisis. But it’s not just the overall level of emerging markets reserves that draws attention. The pace of gold accumulation by emerging markets central banks is mind-boggling. You might have seen a Financial Times article this morning that linked the People’s Bank of China's gold purchases with trade tensions. We think the issue is deeper than that. The chart below clearly shows that emerging markets central banks started to increase their gold holdings soon after the global financial crisis, which might have something to do with a lack of confidence in developed markets' quantitative easing policies.

    Chart at a Glance: Emerging Markets Central Banks’ Gold Holdings – Sign of No Confidence in Developed Markets Quantitative Easing?

    Emerging Markets Central Banks’ Gold Holdings

    Source: Bloomberg LP

    1 The U.S. Bureau of Industry and Security's Entity List is a list of entities that are ineligible to receive any item subject to the Export Administration without a license.


    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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