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  • Emerging Markets Debt Daily

    Mexico Negative Signals Multiply

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 06, 2018
     

    Mexico’s newsflow remains negative, with weak investments and questionable policy initiatives undermining the country’s outlook. South Africa’s widening currency account deficit makes it vulnerable to lower emerging markets inflows and higher global rates.

    The latest policy developments in Mexico (halting the construction of Mexico City’s new airport and a three-year suspension of deep-water oil auctions) amplify the negative signal sent by the weakening gross fixed investments1 momentum. Investments surprised to the downside in September, contracting by 0.9% vs. a year ago, and the outlook is fragile given the impact of policy uncertainty on sentiment. Both manufacturing and services indices2 complied by Instituto Mexicano de Ejecutivos en Finanzas (IMEF) stayed in contraction territory in November. Rising risks to revenue collection is the next link in this logical chain.

    South Africa’s deteriorating current account underscores the challenges facing the economy and policymakers. The deficit widened to 3.5% of gross domestic product (GDP) in Q3 due to a smaller trade surplus and a large income account gap, keeping South Africa in the group of countries with the largest twin deficits (fiscal and external). The reliance on short-term inflows to finance the current account gap makes the country particularly vulnerable to smaller inflows to emerging markets and higher global rates. The rand did not like today’s release one single bit, weakening by 220bps in the morning trade (as of 10:10 a.m. ET, according to Bloomberg LP).

    The equity rout that started in Asia following reports about the arrest of Huawei Technologies’ CFO affected most risky assets this morning. Mixed macro prints in the U.S. (the below-consensus ADP report on private-sector job gains, higher initial jobless claims, the downward revision of durable goods orders) sent the dollar weaker, providing some relief for emerging markets assets later this morning (currencies, in particular). However, they also pushed the implied probability of the Federal Open Market Committee’s December hike down to 65.9%. The market now prices in a mere 36bps of hikes in the U.S. over the next 12 months.

     

  • 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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