“The price action in risky – and even “risk-free” – assets points to multiple concerns about the policy direction, both in EM and DM, as the global growth weakness becomes a factor.”
Market Volatility
We have another busy week ahead of us, with several key central bank meetings (including the U.S. Federal Reserve), important data releases (including emerging markets (EM) activity gauges), and very tight elections (presidential runoff in Brazil on Sunday). The market is still digesting the ECB’s less hawkish attitude this morning – with sizable upside inflation surprises in the region challenging this stance, and causing another bout of volatility in rates. Yesterday’s 25bps intraday drop in the 10-year German yield was followed by an 18bps increase this morning (at 8:37am ET, according to Bloomberg LP).
China Developers Rout
Chinese assets are also under pressure this morning, despite the central bank’s call for more policy support. Chinese developers now go through the third wave of selloffs (see chart below), and the question is whether contagion – which is now going up the credit curve – will get dangerous for the key sectors of the economy, including banks. Reports about more partial lockdowns in China’s key cities and tighter U.S. export controls on tech items did not help to lift the sentiment. The next batch of China’s activity gauges (Purchasing Managers Indices) will be closely watched over the weekend – but the Q3 GDP print provided a cautionary tale that an upside growth surprise can be totally overshadowed by concerns about the policy direction.
EM Tightening Cycles
Finally, the dovish pivot narrative might get challenged in several major EMs. Colombia is expected to maintain the pace of tightening with another 100bps rate hike this afternoon. The question is whether this will be enough for investors, who were alarmed by the latest policy initiatives. The market thinks that the policy rate should be raised to at least 12.4% from current 10% over the next twelve months to compensate for policy shortcomings. The policy framework in the Czech Republic is more orthodox, so the central bank might just get away with extending the pause next week (at 7%). The market expectations for Czech rates are quite sanguine – with a small rate cut being priced in for the next three months, as growth concerns will intensify, while inflation pressures (hopefully) stay moderate. Stay tuned!
Chart at a Glance: China Developers’ Selloff – Third Wave
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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