Turkey Is Smoked – A Perfect Bearish Excuse For EM?



By Natalia Gurushina, Chief Economist, Emerging Markets Bond Strategy

Turkey’s decision to cut rates despite high inflation and the weakening currency was not well received by the market. Does this make other emerging markets “easy targets” for market bears?

Turkey’s move to ‘recommended’ (top authority) 100bp rate cut left the reading ragged this morning. The currency weakened 410 basis points against the US dollar (at 9:20 a.m. ET, according to Bloomberg LP), breaking another significant level of 11.0. The market and analysts are still trying to figure out what is President Recep Erdogan’s endgame, but nothing positive comes to mind other than that a likely collapse in imports will improve Turkey’s trade and current account balances. Lower rates will also boost credit growth, but there is a risk that the benefits of GDP growth will be outweighed by soaring inflation.

From a market perspective, this morning’s initial price action on EM FX has risen fear developments in Turkey may be used as a bearish excuse for other emerging market (EM) assetsespecially in a context of deteriorating growth differentials between emerging markets and developed (DM) / US markets (see graph below), which is an important fundamental consideration for investors. The growth factor has been mentioned several times after today’s inaugural 25bp rate hike in South Africa. Arguably, the central bank has reacted proactively to rising inflation, but with inflation still within the target range, some commentators have argued that the rise could worsen Africa’s near-term growth prospects. from South. The growth factor has been a major driver of monetary policy decisions in emerging Asian markets, where two central banks (Indonesia and the Philippines) have thankfully remained in limbo today. No rate hikes, lower inflationary pressures, rising vaccination rates – can expectations that emerging Asia will be the ‘growth champion’ of emerging countries in 2022 help dampen assets regional?

Turkey is clearly one of the “weak links” in EM, but fundamental and political changes in some emerging markets may make them easy targets for bear markets. The release of Chile’s current account has been overlooked amid the Turkish lira’s ‘excitement’, but its deterioration continues (a record deficit of $ 6.5 billion in the third quarter) – amid an influx of investment Foreign direct uncertain – sent a negative fundamental signal for the currency. This weekend’s presidential elections may provide additional catalyst if the left-wing candidate wins. Stay tuned!

Graph at a Glance: EM-DM Growth Differentials – Getting Thinner

Source: VanEck research; Bloomberg LP

Originally posted by VanEck on Nov 18, 2021.

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PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – PMI Supply Management Institute: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer price index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Price index of personal consumption expenditure: a measure of US inflation, which tracks changes in the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity analysis tools, fixed income securities, hedge fund market indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using the volatilities implied on the options of the S&P 500 Index .; 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 Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Global Emerging Markets Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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