Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    China – No Blanket Easing

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 20, 2020
     

    China kept its Loan Prime rates on hold, as domestic activity continues to rebound. A stronger than expected domestic activity in Central Europe signals that the rate cutting cycle is close to an end.

    China’s decision to keep its 1-year and 5-year Loan Prime Rates on hold is in line with the improving activity data. A popular mid-month gauge – Emerging Industries Purchasing Managers Index (EPMI) – strengthened further in July (to 52.1), indicating that the rebound continued in Q3 (the gauge usually correlates well with the official PMI). Details, however, signal that the recovery is uneven – the EPMI exports sub-index remained well in contraction zone (= global headwinds). There are additional domestic risks associated with severe flooding in parts of China. Finally, the financing costs for China’s privately-owned companies remain high. All these factors call for the continuation of the drip stimulus, which targets specific areas of the economy.

    A stronger than expected rebound in Poland’s industrial production (very close to V-shape – see chart below) sends a positive signal about the region’s near-term outlook. The fact that the European Union managed to reach a last-minute deal on the recovery fund means more support for the Central European growth through additional grants and loans. Policy-wise, a combination of the improving growth dynamics and upside inflation surprises suggests that the rate-cutting cycle is pretty much over.

    Russia’s geopolitical situation might be complicated, but domestic economic policy is still good enough to get a nod of approval from major rating agencies. S&P just affirmed Russia’s sovereign rating at BBB- with stable outlook, pointing out that fiscal and external balances provide buffers against lower oil prices. S&P was also complimentary about the central bank’s ability to maintain a flexible exchange rate, which acts as a major-shock absorber and reduces pressure on the international reserves.

    Chart at a Glance: Poland’s Industrial Production – As Close to V-Shape As It Can Get

    Chart at a Glance: Poland’s Industrial Production – As Close to V-Shape As It Can Get

    Source: 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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.