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Growth remains in focus

As Draghi’s messaging disappoints in Europe, the weak global growth outlook continues to shape emerging markets.

The main event last week was the ECB meeting where Draghi pushed back rate guidance until the end of 2019 and pre-announced a new TLTRO.

Both moves were designed to provide dovish signals to accompany the growth forecast downgrades that followed in the press conference. 

The market, however, was disappointed by the messaging and the ensuing equity weakness in Europe impacted global sentiment, with both the S&P and EM equities losing over 2% on the week. 

A poor headline US payrolls number on Friday also compounded these growth concerns, which in turn weighed on EM local markets performance.

FX bore the brunt of the weakness, although the rally in core rates proved a somewhat supportive factor for the EM rates complex. 

Market review

  • In China, the meeting of the National People’s Congress (NPC) resulted in a revision of the growth outlook to 6–6.5% (from ‘around 6.5%’ previously) while reiterating the commitment to deleveraging in the context of a more effective fiscal policy stance (budget deficit estimated at 2.8%). Further corporate tax cuts were also announced.
  • In Venezuela, much of the country was plunged into darkness last week as the main power generation site experienced a series of failures, with the initial cause thought to be a fire. This raises humanitarian concerns as hospitals struggle to power equipment and as incidences of looting rise; it also provides yet another example of the creaking national infrastructure that desperately needs investment to halt further decline.
  • In Mexico, February’s inflation print slowed to within the central bank’s target band, validating market pricing for a series of interest rate cuts in the coming months as growth also slows.
  • Argentine assets remained under pressure this week as markets fretted over the weekend’s provincial election in Neuquen. The fear was that a Kirchnerist candidate may win; however, as it turns out, the incumbent (an independent) retained control, allaying market fears for now.

Outlook

The market narrative remains focussed on the weak global growth outlook, which currently means core rates are well supported, particularly in light of the recent miss in US CPI data. 

However, with 10-year German Bunds trading at 5bps and the US rates curve pricing almost a full interest rate cut for 2020 – we believe we may be reaching the point of peak bearishness on the growth outlook. 

Central banks remain accommodative, the Federal Reserve has changed tack, China is easing (albeit incrementally) and the first (very small) green shoots may be appearing in Europe with February PMIs being revised up.

In this environment, EM hard currency fixed income has been the go-to asset as well-anchored core rates continue to pull money towards credit. 

However, EM local markets have given back around 2% of performance in the last month, and if growth concerns ease, then value-seeking flows are likely to return to local markets.