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  • Emerging Markets Debt Daily

    Venezuela Political Standoff Intensifies

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

    Venezuela’s power struggle moved to a new level after the National Assembly’s head was proclaimed the interim president. Mexico’s lower inflation should give breathing space to the central bank, which had started to worry about weak growth.

    The power struggle in Venezuela moved to a new level in the past 24 hours. The turnout at yesterday’s national protest was very strong and broad (and, apparently, with a lower level of violence than feared). National Assembly President Juan Guaido was proclaimed the interim president of the country – a move recognized by several countries, including the U.S., but not by Venezuela’s military. There is also an extra geopolitical layer as Russia and China have significant economic interests in Venezuela, and Russia just warned the U.S. against military intervention. Portfolio Manager Eric Fine was on Bloomberg radio this morning (at 9:45 a.m. ET), talking about Venezuela: Listen here.

    Mexico’s below-consensus inflation and the pension funds reform plans gave the market plenty to think about this morning. Bi-weekly inflation moderated more than expected (to 4.52% year-on-year), with a big contribution from lower than expected core prices. This is a welcome development for the central bank, which had started to worry about the impact of its tight policy stance on growth. The pension funds reform plan has several positive elements (that can reduce fees and strengthen accountability/performance incentives). The main concern is that the reform plan could be used by the administration to channel funds into state-sponsored infrastructure projects.

    The EUR/USD cross ignored (a) a sizable gap between activity surveys in the Eurozone (weaker) and the U.S. (stronger – see chart below), and (b) the European Central Bank president’s warnings about downside risks to growth/inflation and uncertainties stemming from geopolitical factors. Many risky assets, including emerging markets currencies, seized the moment, staging a small rally in the morning trade. There are several important macro releases in the U.S. in the coming week, which may affect the dollar. One factor worth keeping in mind is that the dollar’s net speculative positioning remains elevated, and this may potentially limit any upside for the currency.

     

    Chart at a Glance

    Markit US Manufacturing PMI

    Source: Bloomberg LP

  • 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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