Making Sense of Dislocations

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


The market is bouncing back this morning, despite fat negative tail risks. Some EMs sure look interesting after the recent sell off.

Russia/Ukraine Conflict

The market is bouncing back this morning, following (kind-of encouraging) headlines about “negotiations” between Russia and Ukraine, and the imposition of the new – tougher but not “devastating” – sanctions on Russia. The situation on the ground is extremely fluid and dangerous – which means that (1) there are fat negative tail risks, and (2) the latest sanctions might not be final. As of this morning, military operations and missile strikes in Ukraine were still ongoing. However, some brave souls started to “fade” geopolitics (“pullback Friday”), and are looking around for potential “buys”. 

EM and Higher Oil Prices

The first region that comes to mind – especially against the backdrop of higher forecasts for oil prices – is the Gulf. Most countries in the region entered the current geopolitical turmoil in very good fundamental shape, with stronger than expected growth and improved fiscal and external balances. For example, Saudi Arabia is now targeting a fiscal surplus in 2022 – the first in years. A growing rapprochement between the region and Israel helped to remove a major local geopolitical stumbling block.

Brazil Outperformance

Another region which has been hit disproportionately by the latest sell off is LATAM. One regional economy – Brazil – has been a poster child for emerging markets (EM) Fixed Income year-to-date outperformance, which reflected very aggressive monetary policy response and a much better than expected budget outcome for 2021. Today’s release shows that Brazil’s fiscal “fairytale” continued in January, with both primary and nominal surpluses exceeding expectations by a wide margin. Further, the government’s net debt/GDP ratio moderated more than expected to 56.6%. Can Brazil avoid fiscal temptations in the election year? Stay tuned!

Chart at a Glance: Brazil’s Public Sector Debt Trajectory – On the Mend?

Chart at a Glance: Brazil’s Public Sector Debt Trajectory - On the Mend?

Source: Bloomberg LP

Originally published by VanEck on February 25, 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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