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  • Emerging Markets Debt Daily

    Turkey’s Policy “Double Punch”

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    September 25, 2020

    Turkey’s rate hike was followed by the relaxation of currency trading limits, which is a positive development. China will be included in the World Government Bond Index.

    Today was supposed to be China’s big day (a major bond index inclusion), but Turkey’s policy “double punch” stole the limelight. And deservedly so. Yesterday’s surprising 200bps policy rate hike was quickly followed by the relaxation of the currency swap limits of local banks with foreign investors. The market reaction was relatively short-lived (just as it was yesterday). We suspect that global concerns about the virus’s second wave have something to do with it. But, as we said yesterday, the market will also require more proof that the change in Turkey’s policy response function is for real.

    The FTSE Russell1has confirmed that China’s government bonds will now be included in its benchmark World Government Bond Index (WGBI)2 starting from October 2021. Further details will be announced in March 2021, but it is estimated that the inclusion might attract as much as USD120B inflows. This should create a nice technical backdrop for the currency, all things equal. Another aspect of the inclusion is China’s emerging as a “safer haven” investment destination, given that the WGBI focuses on high-quality and highly liquid bonds. Following the Spring IMF Meetings, we highlighted the likely stability of China’s currency and yields in this report.

    Mexico’s central bank delivered the expected 25bps rate cut yesterday, and the market believes there is room for one more in the next three months. A strong rebound in Mexico’s July economic activity, however, suggests that this is not a foregone conclusion. The monthly growth was better than expected (5.69%), with services being the main positive surprise. The latter is an indication that the recovery is getting more balanced. But it can also introduce some upside inflation risks going forward.

    1FTSE Russell – a British provider of stock market indices and associated data services, wholly owned by the London Stock Exchange

    2World Government Bond Index (WGBI) – market capitalization weighted bond index consisting of the government bond markets of the multiple countries


    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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