Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 20, 2020
China’s activity gauge for hi-tech companies shows that the economy continues to rebound. Turkey boosted its FX swap line with Qatar, but the currency’s reaction was subdued.
China’s activity gauge for hi-tech companies (Emerging Industries PMI, or EPMI) continued to advance in May (to 55.9), which is good news because this indicator is correlated with the official Purchasing Managers Index (PMI). The new exports sub-index is still lagging though—an indicator that global growth headwinds remain strong. On the domestic front, consumption is rather anemic. As a result, we do not think that today’s decision to keep the Loan Prime Rate on hold shows tightening bias. The central bank recently removed a reference to “no aggressive liquidity injection” from its monetary policy report, and it might simply be waiting for additional guidelines from the National People’s Congress that starts this week.
Turkish authorities announced a USD10B increase in the FX swap line with Qatar (to USD15B), but the currency’s reaction was quite subdued. The lira failed to participate in today’s EMFX rally, even though the new swap line means a big one-off boost to the country’s gross international reserves. One possible explanation is that Turkey’s financing gap for 2020 is large and the new funds cover only a small portion of it. In addition, the market expects another 50bps policy rate cut tomorrow, which will push the real policy rate from -0.4% to -0.9% (adjusted by 12-month ahead inflation expectations), further weakening the fundamental support for the currency.
Fiscal rules across emerging markets (EM) are getting increasingly suspended, as the coronavirus exerts a heavy toll on governments’ financing. Poland—with its 10% of GDP fiscal stimulus—just confirmed its plan to widen the range of scenarios that would justify the suspension. Russian newspapers report that the government’s fiscal rule might be dropped altogether until the economy recovers. In practical terms, this means that additional oil revenue will be spent rather than saved, which is likely to increase the ruble’s correlation with oil.
À propos: I do not have a chart for you today, but I have a poem. It is rather long (just like many other Russian literary masterpieces), so I will leave you with the last three verses. The poem is called “Don’t Leave Your Room” and it was written in 1970 by Joseph Brodsky:
Don’t leave your room. Go dance the bossa nova, shoes without socks, your body bare and coat tossed over. The hallway holds its smells of ski wax and boiled cabbage, writing even one letter more is excess baggage.
Don’t leave your room. Do you still look handsome? Just ask the room… Incognito ergo sum, as petulant Substance once remarked to Form. It’s not exactly France outside. Don’t leave your room!
Don’t be an idiot! You’re not the others, you’re an exclusion! Choreograph the furniture, essay wall-paper fusion. Make that wardrobe a barricade. The fates require us to keep out Cosmos, Chronos, Eros, Race and Virus!
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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