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  • Emerging Markets Debt Daily

    EM Growth Backdrop – 2nd Wave Concerns

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 21, 2020

    It’s a “on the one hand, on the other hand” morning as regards EM growth backdrop. Important positives included China’s accelerating Emerging Industries PMI (up by 0.4 to 52.5 in August), the improving momentum in South Korea’s exports (yearly decline narrowed to -7%), and a big upside surprise in the U.S. Markit PMIs (Purchasing Managers Indices). On the other hand, the Eurozone’s services PMI disappointed big time in August, reminding that growth headwinds are real and that the virus’s second wave is a force to be reckoned with. The latter also raises a question whether the U.S. PMIs are genuinely outperforming (the U.S. Dollar clearly behaves this way today) or simply lagging.

    Turkey’s much-anticipated “new era” reveal was somewhat disappointing. The very fact of a new gas field discovery is, of course, positive (we all remember what a similar discovery did for Israel’s current account). However, there are several caveats. First, the field’s size is smaller than initially reported. Second, it will take 7-10 years to develop the field. And this leaves plenty of time for policy deficiencies to be reflected in asset prices.

    There was a sigh of relief in Brazil this morning, after the lower house kept the presidential veto on public servants’ wage increases. Brazil’s 2020 budget deficit is expected to be the largest among major EM (see chart below). So, it cannot afford to make too many policy blunders on the fiscal front.

    Chart at a Glance: EM Fiscal Picture Is Not Uniform



    Source: Bloomberg LP


    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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