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China Industry – Divergence Is the Word

This article was originally published on ETFTrends.com.

By Natalia Gurushina, Economist, Emerging Markets Fixed Income, VanEck Global

China’s industrial profits looked very weak in October, but there was huge divergence between trade-related companies and those that benefit from domestic stimulus. Argentina’s president-elect said that he does not need more money from the IMF.

China’s industrial profits scared the life out of everybody this morning, dropping by 9.9% year-on-year in October. Details, however, show a more nuanced picture. Sectors that were hit the hardest were mostly trade-related—nothing surprising here. By contrast, infrastructure-related companies did extremely well (stimulus, anyone?). Companies that operate in consumer-related sectors also showed okay results. So, while we remain very concerned about a combined negative impact of lower producer prices and still high financing costs on Chinese companies (especially private), and while the outcome of Phase 1 of the trade talks can be a game-changer, the “drip” stimulus is bringing results and we expect to see more of it in the coming weeks.

Argentina does not need more money from the IMF. What!?!? Yes, according to President-elect Alberto Fernandez, Argentina needs more time to develop, rather than additional financing from the IMF. One potential implication is that the incoming administration will be less inclined to tighten the fiscal belt, while still mulling things over with the IMF. Even though time is not quite on Argentina’s side, next year’s payments to the IMF are quite small and this gives the new administration some breathing space while it negotiates with debt holders—especially as the central bank is no longer losing the reserves.

The U.S. “economic exceptionalism” was on full display this morning, following an upside revision of Q3 GDP growth (to a solid 2.1% quarter-on-quarter) and stronger than expected capital and durable goods orders for October. These last point to a big jump in business equipment demand, usually associated with a stronger growth outlook. If anything, this should further dampen the residual expectations of the Federal Reserve’s rate cut in January.

Please note: Emerging Markets Debt Daily will not be published November 28-29. We look forward to resuming our daily updates on December 2.

IMPORTANT DEFINITIONS & DISCLOSURES

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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