Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 02, 2020
If you like science fiction and are a fan of the Matrix Trilogy, you might think that The Architect (the super-human dude of vast intelligence) got seriously bored early this morning. Yes, I am referring to the latest twist in the U.S. election saga that saw President Trump testing positive for COVID. One emerging market that had a visible impact (at least so far) is Russia (the currency and the stock market). This is due to heightenedgeopolitical concerns and a higher risk of new sanctions under Biden’s administration, should he win the election. A short while ago, Russia’s central bank announced that it will be selling FX in Q4 2020 to reduce the currency’s volatility.
The decline in Argentina’s international reserves intensified quite a bit in the last week of September (see chart below), and the gap between the official and “market” exchange rates was getting close to 100%. So, authorities decided to act. The government lowered export taxes for soy and some other products, the central bank raised the repo rate by 500bps to 24%, promising to add more volatility to the official exchange rate, and said that it will not allow top government officials and lawmakers access to U.S. dollars. While this is a step in the right direction, it is clearly not enough. For as long as authorities keep the dual exchange rate system, the macroeconomic imbalances will continue to accumulate.
The Brazil recovery story suffered a setback this morning after August’s industrial production surprised to the downside (up 3.2% month-on-month vs. expected 3.8). We try not to make far-reaching conclusions on the basis of just 1 month of data—especially in a situation when there are multiple COVID-related disruptions and distortions. The government and the central bank had provided a sizable stimulus to support the economy, and the latest activity gauges (very strong Purchasing Managers Indices) suggest that the recovery should continue in the coming months.
Chart at a Glance: Argentina Keeps On Losing Reserves
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.
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