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  • Emerging Markets Debt Daily

    Sharp Escalation of Trade War Tensions

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 13, 2019

    Trade war tensions intensify, with China announcing its retaliatory measures. Turkey’s smaller than expected current account gap signals that external adjustment is still working as intended.

    Risky assets are under pressure this morning on the back of escalating trade war tensions and negative geopolitical headlines 
    (Iran’s ultimatum to resume uranium enrichment within 60 days). China has just announced its retaliatory measures, including higher tariffs on some U.S. goods from June 1—after President Donald Trump gave it one month to sign the deal or face tariffs on all Chinese imports to the U.S. China’s referencing of its UST holdings also did not go unnoticed. Some commentators suggested that a possible meeting between President Trump and President Xi Jinping in Osaka at the end of June may ease tensions. In the meantime, we see numerous downward revisions of China’s 2019 gross domestic product growth and weaker currency projections.

    We often comment on questionable changes in Turkey’s economic policy, but the good news is that the external adjustment process is still working as intended. The current account deficit surprised to the downside in March (USD0.59B) in response to weak domestic demand and the sliding currency. The financing side, however, looks more “wobbly”. Errors and omissions implied large capital outflows (USD4.3B)—a big headache for the central bank, which tries to limit the extent of the lira’s depreciation.

    Downside surprises in India’s price dynamics leaves room for additional policy easing. Yearly headline inflation rose less than expected in April (to 2.92%) and core inflation remained on a downward trend, easing to 4.55% year-on-year. Today’s releases echo the dovish tone of April’s monetary policy minutes, “complementing” disappointing activity data and opening the door for a rate cut in June.


    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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