What Has Changed in EM

  • China eased restrictions on how local governments can spend money
  • Trump threatened sanctions over the Nord Stream 2 project
  • Russia central bank started an easing cycle
  • Turkish central bank delivered a dovish hold
  • Argentina President Macri picked Peronist Senator Pichetto as his running mate
  • US tariffs on Mexico were called off

China eased restrictions on how local governments can spend money raised by issuing so-called special bonds. The Ministry of Finance said it would allow a portion of those funds to be used as capital for qualified major infrastructure projects. The special bond quota was raised this year to a record CNY2.15 trln ($311 bln), and so the moves suggest a growing reliance on infrastructure spending to offset the headwinds from the trade war.

President Trump threatened sanctions over the Nord Stream 2 project. This is a natural gas pipeline from Russia to Germany. Reports suggest US natural gas producers are eyeing Europe as a major export market. Indeed, Poland just signed a contract to purchase an additional $8 bln of liquified natural gas from US producers during this current official visit by President Duda. Trump said he plans to with President at the G20.

Russia central bank started an easing cycle. It cut rates 25 bp to 7.5% and Governor Nabiullina said 1-2 more cuts are possible this year. The bank cut its 2019 inflation forecast to 4.2-4.7% from 4.7-5.2% previously and cut its 2019 growth forecast to 1.0-1.5% from 1.2-1.7% previously. We believe the easing cycle may continue at the next meeting July 26.

Turkish central bank delivered a dovish hold. In its policy statement, the bank dropped its pledge to “maintain the tight monetary stance until the inflation outlook displays a significant improvement.” Inflation is falling while the lira has stabilized. If this continues, we see potential for the easing cycle to start at the next policy meeting July 25. However, much will depend on how the lira is trading then.

Argentina President Macri picked Peronist Senator Pichetto as his running mate. This move is clearly meant to pick off support from the Fernandez wing of the Peronists. Furthermore, Pichetto would likely be helpful in getting more economic reforms through Congress. Reports suggest Macri would focus on trade liberalization, labor and social security reforms in his second term.

US tariffs on Mexico were called off. The two countries have reached an agreement, though there is some confusion as to what was agreed upon. President Trump claims that Mexico agreed to large-scale purchases of US agricultural goods, but Mexico would not confirm. Press reports suggest that many aspects of the deal had already been agreed upon. Still, the truce is a welcome step back from the precipice.