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  • Emerging Markets Debt Daily

    Revived US-China Trade Tensions Rattle EM

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 06, 2019

    The U.S.-China trade talks’ concerns are back with a vengeance, hitting risky assets. Uncertainty about Istanbul elections and reserves weigh on Turkish assets.

    President Donald Trump’s threat to raise Chinese tariffs on Friday
    and concerns that this may jeopardize the U.S.-China trade negotiations dislodged most risky assets in the overnight trade. A better than expected Caixin services Purchasing Managers' Index (PMI , see chart below)—together with its message that Chinese consumers are doing fine—was pretty much ignored. China’s economic calendar for this week is pretty heavy (reserves, inflation, trade balance), but we suspect that headline risks will dominate between now and Friday.   

    Turkey underperformed most of its emerging markets peers this morning, with the lira crossing the psychologically important threshold of 6.0/U.S. dollar. The reasons are twofold. First, the market is expecting the election authority’s verdict on the municipal election in Istanbul, as President Recep Tayyip Erdogan stepped up pressure saying that there was a “clear case of fraud”. Second, uncertainties around the international reserves’ accounting refuse to die down. It has now been confirmed that state-owned banks are selling U.S. dollars (USD400M so far today). The morning’s most popular exercise is calculating how much longer this can last, given that the country only has an estimated USD26B in its net international reserves.

    Argentina’s latest central bank survey showed a very sharp deterioration in inflation expectations. Median expectations for 2019 jumped by 4% to 40%, and median expectations for 2020 rose by 2.2% to 25.2% as the currency resumed depreciating in the second half of April. It remains to be seen whether the central bank’s interventions will succeed at stabilizing the peso in the coming months (the survey now places it at 51.2 vs. U.S. dollar at the end of the year). With inflation expectations looking completely unanchored, the central bank may not have a choice but to keep interest rates very high—at the expense of economic growth (and potentially costing President Mauricio Macri his chances of getting reelected).

    Chart at a Glance

    Caixin China PMI

    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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