Invasion, Contagion or Inflation?

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

Is Russia/Ukraine bond selloff affecting other markets in the region? Or are there other factors at play?

Russian and Ukrainian bonds extended their selloff today, which is completely logical given the escalation of the conflict between the two countries and the increasingly negative newsflow (including a major cyberattack against Ukraine’s government websites). One development noted by observers today is that several other EMEA bonds – in Poland, Hungary, and Romania – came under pressure as well (see chart below). Is it contagion, or are there some other factors at play? The contagion risk for Poland should not be completely dismissed – including another wave of refugees in the case of a military confrontation – but inflation concerns dominate right now.

Poland’s headline inflation rose to 8.6% year-on-year in December and core inflation is expected to accelerate to 5.2% (the release is on Monday), most likely prompting further rate hikes. The government is trying to do its bit as well, introducing short-term tax cuts and subsidies – albeit these measures might backfire, buying some time now but leading to higher inflation later on. Poland is a big part of the local bond index (7.3% of J.P. Morgan’s GBI-EM Global Diversified Index), so the central bank’s ability to bring inflation back to the target range and the government’s ability to maintain fiscal discipline in the pre-election year will be closely watched. Similar to Poland, the inflation drumbeat and authorities’ response function are major Fixed Income drivers in Hungary and Romania. Hungary’s inflation ended the year on a “high note” (7.4% year-on-year, which is another upside surprise), while Romania’s “meek” 25bps rate hike reinforced concerns that the central bank is falling behind the curve.

The Russia/Ukraine conflict and its wider implications for European security overshadowed several other newsworthy emerging markets (EM) developments, including China’s gargantuan trade surplus, which reached USD94.46B in December. On the surface, we see stronger exports and weaker imports. Digging deeper, we focus on the nature of China’s stimulus – which is mostly supply-side driven – and its implications for inflation (fewer upside risks) and the growth model (the role of consumption vs. the role of investments). We’ll be talking about these issues next week, when China releases the next batch of its domestic activity indicators. Stay tuned!

Charts at a Glance: Geopolitics Drives Russia/Ukraine Selloff – What about Central Europe?

Charts at a Glance: Geopolitics Drives Russia/Ukraine Selloff – What about Central Europe?

Source: Bloomberg LP

Originally published by VanEck on January 14, 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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