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  • Emerging Markets Debt Daily

    Wanted! China's Market Economy Status

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 17, 2020
     

    China fails to get a market economy designation from the WTO. Brazil’s rate-setting meeting is closely watched.

    I am writing this daily from my car in a parking lot for the village church. The neighborhood router is out. And this is the only place with decent reception. So I am adding this to the list of seriously weird places to write the daily. I need to create a coffee table book about it one day...

    Tensions in Asia are moving to the forefront, with a long list of headlines that includes the Korean Peninsula escalation, the India-China border conflict, Chinese jets’ “excursion” into the Taiwanese airspace, the COVID outbreak in Beijing, and, finally, China’s failure to secure a market economy designation from the World Trade Organization (WTO) in its trade investigations. China let its WTO “status” dispute against the EU lapse, which can make it easier for the U.S. and the EU to impose new tariffs on Chinese goods and introduce other measures to combat “unfair” advantages enjoyed by Chinese exporters.

    The ranks of “Emerging Markets (EM) Graduates”economies with very solid macro and institutional frameworks—are expanding, but this comes with some side-effects, such as stronger currencies. The main problem is that this often interferes with monetary easing—like in two Central European “graduates”, Poland and the Czech Republic. Poland’s national bank attempted to talk the zloty down yesterday, warning that a lack of “visible” currency adjustment is a threat to the post-COVID recovery. However, so far verbal interventions in both countries are falling on deaf ears.

    Today’s focal point in Brazil is the central bank’s rate-setting meeting. The consensus expects a 75bps rate cut, but what is even more important is a signal that it is willing to extend the current easing cycle. The market thinks “yes”, pricing in an additional 25bps cut (to 2%). The macro backdrop looks supportive—growth is very weak and inflation dropped to 1.88% year-on-year in May, well outside the 2.5-5.5% target range. However, some analysts are openly asking whether the central bank has gone too far—not the best question to see in a publication.

  • 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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