Colombia: reshuffle does not spell disaster
Nicolas Jaquier and Christine Reed discuss Petro’s surprise cabinet reshuffle, its short- and long-term implications, and how fixed income markets have reacted.
August was a volatile month for financial markets after minutes from the US Federal Reserve’s July meeting and a raft of stronger US economic data pointed to the potential need for further policy tightening. Given the moves in US yields and the resultant US dollar strengthening, EM fixed income and currencies weakened over August.
Ghana continued to make progress on its local debt restructuring, while the central bank in Zambia hiked rates by 50bps to 10%, as currency pressure is expected to continue to weigh on inflation. There was also political turmoil in Gabon, with a military coup taking control of the country and establishing a transitional government.
It was another China-centric month in Asia, with sentiment towards the country remaining weak overall and spilling over to weigh on many currencies in the region. However, post month-end, the announcement of nationwide support measures boosted sentiment somewhat. After months of uncertainty, a prime minister was finally appointed in Thailand.
The Central Bank of Brazil started to cut rates (by 50bps), a slightly bigger cut than market expectations. In contrast, central banks in both Mexico and Colombia kept rates on hold. Brazil’s President Lula da Silva’s proposed fiscal framework was approved by the lower house. Argentina and the IMF reached a deal to devalue the currency to unlock the next tranche of IMF financing.
Central and Eastern Europe (CEE)
Economic activity data (mainly PMIs) remained at subdued levels in the region, with downside surprises notably in Poland. While economic data remains broadly weak, it is no longer surprising consistently to the downside. Similarly, falling inflation came as less of a surprise, and the narrative in the Czech Republic is shifting in the direction of rate cuts.
Rest of Europe, Middle East and Africa (EMEA)
Policymakers in Turkey continued to extend macroprudential measures. Moody’s suggested that if this orthodox policymaking path continues, it could lead to a “positive outlook” rating for the country. But inflation remains troublesome and growth weak. Elsewhere, an improving inflation picture increases the likelihood that the South African Reserve Bank has completed its hiking cycle.
EM corporate debt highlights
EM corporate bonds came under some pressure over August, with the JP Morgan CEMBI BD returning -0.4%. The asset class was impacted by both widening spreads and rising US Treasury yields, with high-yield issuers outperforming investment-grade, helped by its lower interest rate sensitivity.
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