Market Reversals – Hopes, Concerns, Uncertainty

21 November 2022

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Concerns about China’s re-opening soured the sentiment, but Brazilian assets got a reprieve, reflecting hopes that President-elect might not be too populist after all.

Brazil Fiscal Policy

The U.S. Dollar regained some ground in the risk-off morning trade, with the Brazilian real being the only major emerging market (EM) currency bucking this trend and rallying by 69bps against the greenback (according to Bloomberg LP, as of 10:07am). Why? Brazilian assets took a beating last week as the market got disappointed by President-elect Luiz Inacio Lula da Silva's spending plans (to the tune of 1.7-2% of GDP). The weekend’s newswires, however, brought some hope that Lula-the-pragmatist might be back. Lula acknowledged the market’s negative reaction and suggested that he might follow orthodox economic advice – provided it is good (whatever “good” means). Brazil’s central bank governor Campos Neto is not in a forgiving mood, though – he said he watches the fiscal proposals very closely – and the local swap curve is priced in additional rate hikes for December-March 2023 (73bps).

China Growth Outlook

The sentiment reversal in China reflected growing concerns about the COVID flareups (see chart below) and their impact on the government’s re-opening plans. South Korea’s 20-day export numbers – which showed that the decline in exports to China accelerated to -28.3% year-on-year – did not add much optimism either (even though the print is backward-looking). It remains to be seen whether these developments will have a meaningful impact on the next batch of China’s activity gauges (out on November 29). In the meantime, the central bank is nudging local banks to provide more property loans – the housing sector accounts for a large portion of GDP and is key to consumer sentiment and financial stability.

EM Asia Policy Tightening

Policy uncertainty is back in Malaysia, where the weekend’s general elections unexpectedly resulted in a hung parliament. Malaysia is a big liquid market for EM bonds – it accounts for nearly 10% of the J.P. Morgan’s GBI-EM Global Diversified Index – and this explains why we care about local politics. The issue at hand is that Malaysia’s budget deficit got stuck around 6% of GDP since the pandemic, and the expected decline to 5.4% of GDP in 2023 is now less certain. A good thing is that the central bank has been proactively hiking to cap inflation pressures – but it might need to do more if the government would be slow to adjust its fiscal accounts. Stay tuned!

Chart at a Glance: China New COVID Cases – Spiking Again

Chart at a Glance: China New COVID Cases - Spiking Again

Source: Bloomberg LP.


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