Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 11, 2020
China’s credit and monetary aggregates surprised to the upside in April, reflecting pent-up demand and the policy stimulus. Argentina extended the deadline for its debt restructuring proposal.
China’s credit and monetary aggregates for April were down from March but surprised to the upside. Pent-up demand remained a major driver last month, but the policy stimulus was working as well. Lower yields and looser regulations bolstered corporate financing. Another positive shadow financing print (albeit not as big as in March – see chart below) signaled that authorities intend to use all channels to support small and medium sized companies that were disproportionately hit by the deleveraging drive. The tolerance of higher leverage was on full display in the central bank’s latest quarterly monetary policy report, which (1) removed a key phrase about “avoiding excess liquidity flooding the economy”, and (2) noted that M21 and total social financing growth can exceed nominal GDP growth.
Today’s price action in Brazil’s bond and currency markets indicate that political noise continues to affect asset prices. This is despite the fact that Economy Minister Paulo Guedes made another push to reassert his authority over the macroeconomic policy agenda. In his Saturday’s remarks, the minister was actually quite optimistic on the growth outlook, arguing that the V-shape recovery was the most likely outcome. He noted that authorities will continue to provide ample liquidity if necessary, but was adamant that higher public investments was not the right policy tool.
Argentina’s government extended the deadline for its debt restructuring proposal until May 22 (the end of the grace period). The move was expected, as the initial acceptance rate was very low. Investors hope that the proposal will be improved (check today’s bond prices). The recent comments from Economy Minister Guzman indicate that the government is not opposed to additional tweaks. According to local press the government is considering removing principal haircuts, increasing coupon, adding interest capitalization, shortening grace period, and potentially adding some kind of warrant.
Chart at a Glance: China Credit – Strong Recovery
Source: Bloomberg LP
1M2 – a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds, and other time deposits.
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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