Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 28, 2020
Turkish assets are hit by a regional military flare-up, as Turkey is taking sides. Mexico’s new pension reform draft is in congress—a mandated big cut in fees raised independence concerns.
A regional military flare-up is having an impact on Turkish markets this morning. The (long-running) territorial dispute between Armenia and Azerbaijan over the enclave of Nagorny Karabakh1is back in headlines, with Armenia accusing Azerbaijan of military aggression, reportedly declaring a war and total military mobilization. Turkey is backing Azerbaijan in this dispute, whereas Armenia has a mutual defense pact with Russia. Russia is reportedly selling weapons to both sides. Total mess. Russia, however, looks stronger militarily (and economically), which explains why Turkish asset prices were hit harder (at least initially). The currency crashed to a new historic low in the morning trade, undoing the positive impact of last week’s surprising rate hike and potentially requiring more policy tightening.
Pension reform rollbacks in Latin America (LATAM) are back in focus, after Mexico’s government sent its formal pension reform proposal to the congress on Friday. A big immediate reduction in pension fund fees—by decree—raised the most concerns. This is a new suggestion, and many fear that it may be followed by other “normative” changes that can affect pension funds’ investment processes and decision making.
An upside surprise in South Africa’s producer prices (PPI) is yet another indication that the emerging markets (EM) near-term inflation outlook is far from being settled. PPI accelerated to 2.4% year-on-year in August—up from mere 0.4% just a few months ago (May). Today’s release comes on the heels of higher than expected July’s consumer prices, which led to the central bank’s surprising decision to stay on hold earlier this month, and shifted the market expectation towards no additional easing on a six-month horizon.
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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