Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 09, 2020
China’s upbeat activity data boosted the market sentiment. India’s central bank stayed on hold, but announced additional steps to support growth.
China’s equity indices and the currency re-opened very strongly after the holiday week, following optimistic reports about domestic consumption. In addition, the Caixin services PMI accelerated more than expected in September (54.8), boosting sentiment and signaling that the rebound is getting more balanced. China is rightly considered a trailblazer in the current crisis (in many respects), and one thing we like to do is putting China’s assets in a global context. Today’s comment includes a table that shows China’s longer term currency correlations with major emerging markets (see below). There are some interesting regional patterns, which might be worth keeping in mind when thinking about China’s exposure in your portfolios.
We’ve got a dovish hold in India today – the central bank kept all policy rates unchanged (as expected), but announced a bunch of additional measures to support growth. These include liquidity injections, macro-prudential changes, and scaled-up purchases of government bonds. The main takeaway is that growth remains top priority, and monetary authorities intend to do “whatever it takes” to pull the economy out of recession. The recent spike in inflation is deemed transitory and not a concern.
Brazil’s headline inflation accelerated more than expected in September, but it looks like this was mostly due to a big jump in food prices (which might prove temporary – hence ignored by the central bank). Commenting on EM inflation these days is a thankless exercise. There is still a lot of noise stemming from COVID-related distortions and – importantly – the speed with which these distortions fade away. Some countries where it happens faster – like Hungary – might see more abrupt drops in inflation. As regards Brazil, annual inflation remains very low (3.14%), and the central bank’s communications indicate that they are more concerned about fiscal adjustment. We concur.
Chart at a Glance: China’s Currency Correlations with EM – Check Regional Patterns*
Source: VanEck Research; Bloomberg LP
*CNY – Chinese Yuan in the onshore mainland China Market
CNH – Chinese Yuan in the offshore market, which is outside of Mainland China (onshore market)
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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