By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
Global Volatility
Global interest rates’ volatility (MOVE Index)1remains extremely high by historical standards, and global FX volatility (JPMVXYGL Index)2is the highest since the onset of the COVID pandemic. Emerging markets (EM) currencies with questionable fundamentals (a lack of fiscal adjustment, widening external deficits, political noise) find themselves under more pressure in this environment. Being close to a major geopolitical hotspot (Russia/Ukraine war) – in addition to having yet another spat with the key trade partner (European Union) – helps to explain why the Hungarian forint is the third worst-performing global currency (“extended majors”) so far this year after the Turkish lira and the Argentine peso. And the forint is struggling again this morning, weakening by 216bps against the U.S. Dollar (as of 10:20 am ET, according to Bloomberg LP). Hungary is also at the bottom of the EM local debt year-to-date total return ranking (see chart below). Hungary’s aggressive rate hikes – with the nominal policy rate now close to Brazil – do not make a lot of difference when other policies are weak.
LATAM Politics
The country’s local debt performance is unique in Brazil – this is the only constituent of the J.P. Morgan’s EM local debt index (GBI-EM), which has positive interest rate, price, and FX year-to-date returns (check the chart below). The question is whether Brazil’s relative outperformance can hold after the weekend’s presidential elections. The recent polls suggest that the former president Luiz Inácio Lula da Silva – known for his populist bias – might win in the first round. We might see some knee-jerk market reaction if that indeed happens, but Lula has been leading in the polls for quite some time now, so his electoral victory should be more or less priced in. In his recent communications, Lula sounded more centrist and market-friendly. But as usual, we will need to see the cabinet line-up, the composition of the parliament, and policy announcements before the final assessment.
EM Tightening Cycle
The total return table below also explains why the market keeps an eye to today’s rate-setting meeting in Mexico and the Czech Republic. Czech local bonds did not perform too well this year, but the national bank kept the policy rate on hold this morning (there were some residual concerns about a rate cut) and the governor’s statement was not excessively dovish. Mexico’s local debt is among top 5 performers so far this year, with a high interest return and a non-negative FX return. The market expectations for Mexico’s central bank have been moving in lockstep with the U.S. Federal Reserve in the past couple of months, and the consensus expects to see a 75bps rate hike in the afternoon. The wording of the statement and guidance will also be key – as of this morning, the local swap curve was pricing in a fairly aggressive interest rate path for the next 6 months (around 200bps of additional hikes). Stay tuned!
Chart at a Glance: EM Local Debt “League Table”
Source: Bloomberg LP
Originally published by VanEck on September 29, 2022.
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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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