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  • Emerging Markets Debt Daily

    Opposition Win in Turkey: A Turning Point?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    June 24, 2019

    The opposition’s victory in the rerun of the Istanbul elections gave a boost to Turkish assets. Mexico’s weakening economic activity reinforced expectations of policy rate cuts.

    Turkish assets staged a sizable rally after the opposition candidate won the rerun of Istanbul’s mayoral election with a margin of approximately 9%
    , which is considered a serious blow to President Recep Tayyip Erdogan and the ruling AK party. The focus now shifts to the government’s policy agenda, as authorities spent a lot of resources (fiscal, currency interventions) to support growth and ensure the lira’s stability in the run up to the vote. The market believes that further disinflation and a gradual recovery in real sector confidence should pave the way for policy rate cuts (to the tune of 150bps in the next three months). A key risk to this scenario comes from geopolitics—specifically U.S. sanctions over Turkey’s purchase of a Russian missile system as this may result in another bout of currency weakness.  

    Mexico’s economic activity indicator undershot consensus by a wide margin in April, falling by 1.41% year-on-year. This is the weakest reading since 2013 (see chart below) and it helps to explain why the market continues to price in policy rate cuts on a 12-month horizon (81bps as of this morning, according to Bloomberg LP). The headline inflation dynamics seem to support this sentiment—bi-weekly headline inflation was a touch lower than expected, bringing yearly prices back to the target range of 4%. One concern—which is closely watched by the central bank—is sticky core inflation. The bi-weekly print was once again higher than expected, keeping yearly core inflation close to the top of the target range of 2-4%.

    Brazil’s external accounts posted very strong readings in May, providing a solid fundamental backdrop for local assets. The current accountposted a USD662M surplus and the foreign direct investments (FDI)inflows reached USD7.07B, pushing the country’s basic balance (a sum of current account and FDI) further into the black. With the fundamental support already in place, a near-term catalyst may come in the form of the new pension bill’s approval. The bill is currently in the lower house, and the speaker believes that the floor vote can take place in the first half of July.

    Chart at a Glance

    Mexico Economic Activity Indicator

    Source: Bloomberg LP

    1Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.
    2Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.

    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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