12 May 2022
VanEck Blogs | Emerging Markets Debt Daily
Market Panic vs. Policy Options

The markets are in a somber mood today, as investors assess growth/inflation policy tradeoffs and China’s growth/COVID challenges.

Global Growth/Inflation Tradeoffs

It’s Day 4 of our research trip to Central Europe, and the deteriorating global sentiment – against the backdrop of upside inflation surprises, growth headwinds and concerns about available policy space – permeates all discussions. Two issues that pop out most frequently are: (1) share of inflation that can be attributed to global factors (=whether central banks can address price pressures without slowing the economy too much); and (2) coordination between monetary and fiscal policies (=growth/inflation trade off). Both issues are relevant not only for EMEA (or wider emerging markets (EM)), but also for developed markets (DM). An example of the latter are growth headwinds in the U.S. created by a combination of fiscal and monetary tightening. By contrast, a more accommodative fiscal stance in Europe might help to mitigate at least some recession risks.

Global/Domestic Inflation Drivers

Central banks emphasized during our meetings that rate hikes can only target a small portion of upside inflation pressures stemming from domestic demand (20% or so). And at times, some of them sounded as if their job (rate hikes) was almost done. However, underestimating the second-round effects from global price shocks can result in falling behind the curve, putting more pressure on local bonds and currencies. We will be having two more rate-setting meetings in other parts of EM this week – Mexico (+50bps expected) and Peru (+50bps expected), and it will be interesting to see how these challenges are addressed by their respective central banks.

China FX Weakness Tolerance Limit

China might be far from Europe geographically, but it is always an important part of regional discussions due to trade connections and the renminbi’s role as a general anchor for many EM currencies. The renminbi continued to creep closer to not-so-magnificent 7 against the U.S. dollar, with another big move today (down by 100bps as of 8:25am ET, according to Bloomberg LP). We maintain that this is the right direction, given the shrinking interest rate differentials with the U.S., capital outflows and near-term growth concerns. However, the speed of the adjustment might be too fast for the central bank, so we would not be surprised to hear more from it in the not-so-distant future. Stay tuned!

Chart at a Glance: Chinese Renminbi’s Depreciation - Too Fast for Comfort?

Chart at a Glance: Chinese Renminbi’s Depreciation - Too Fast for Comfort?

Source: Bloomberg LP


This material may only be used outside of the United States.

This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck Vectors ETFs, please visit our website at www.vaneck.com.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income