Contents
Market Overview
Macro Review
The Fed Chair debate remains firmly in the limelight. Betting odds have narrowed so much that Betfair is offering shorter prices on Brainard over Powell. In the first instance, the market perception is a more dovish Fed under Brainard. However, it was difficult to escape the wave of inflation spreading globally. Chinese PPI rose at its fastest in 26 years (13.5%) while CPI was at its highest since September 2020 (1.5%). Japanese PPI jumped to its highest level in 40 years (8.0%) and German wholesale goods rose at their fastest pace since 1974. In fact, the gap between U.S. PPI and CPI is increasingly widening, suggesting the ability to pass on broad-based inflation is experiencing some challenges. U.S. CPI may have increased to 6.2%, which is the highest reading since 1990, but PPI is running at 8.6%. G10 breakeven swaps were clearly on the ascent over the week, and consequently, UK 10-year real yields are now at their all-time lowest of -326bps. A similar argument applies to the U.S. at -125bps, but the major moves were associated with the five year breakeven at all-time highs. Meanwhile, Australian unemployment is rising once again, European COVID cases are starting to decline despite tighter restrictions in the Netherlands and Austria, and the UK is reportedly prepared to trigger Article 16 and ditch customs checks before Christmas. In EM, Mexico, Peru and Romania hiked rates and inflation ticked higher in Brazil, Chile, Czech Republic and Hungary. The Turkish lira also depreciated to a new low, just as DXY moved to a YTD high. In Chinese property, Evergrande averted default by remaining current on coupon payments but Kaisa opted to dip into the grace period. Amid all of this, the S&P 500 finally gave in and ended its longest winning streak since 2017, but we have still witnessed 63 fresh all-time highs this year. In fact, for only the thirteenth time since 1995, the S&P 500 closed at an all-time high, while the VIX Index rose one percentage point on the day.
EM Credit Update
Emerging market sovereign credit was unchanged this week, but spreads were 12-14bps tighter. Tunisia, Suriname and Lithuania outperformed, while Ethiopia, Sri Lanka and El Salvador lagged. The inflation breakeven impact was the clear driver of nominal core rates, with real yields moving into deeper territory. However, this also coincided with a weak 30-year U.S. Treasury auction that carried a 5.2bps tail, adding further pressure to the rate curve when futures positioning is already net short. Prior to the Wednesday sell-off, the German 30-year bund tightened 11bps only the day prior, reflecting an almost four standard deviation move.
The Week Ahead
Chinese retail sales, industrial production and FAI growth will offer a good indication of the 4Q recovery next week. This comes after a softer 3Q, driven by power shortages, virus outbreaks and tighter regulatory scrutiny on a number of industries. Interest rate decisions are due from Hungary (1.8%), Indonesia (3.5%), Philippines (2.0%), South Africa (3.5%) and Turkey (16.0%). With inflation continually in focus, Israel is worth monitoring given the strength in the shekel but the Central Bank decision isn’t until November 22. Other inflation prints of note are from Poland and South Africa, as well as GDP releases from Chile, Colombia, Hungary, Israel, Peru, Romania and Thailand. After Germany’s wholesale price rises, we can expect a fair amount of attention on UK inflation, along with the second-reading of Eurozone CPI data. By the same token, keeping one eye on Japanese stimulus will be key as figures are expected to be as high as JPY40tn ($350bn).
Highlights from emerging markets discussed below include: The Bolsonaro Administration edges closer to adjusting Brazil’s constitutional spending cap, targeting higher fiscal expenditures ahead of 2022 Presidential Elections; and South Africa’s Medium Term Budget Policy Statement (MTBPS) delivers on near term expectations.
Fixed Income
Equities
Commodities
Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of November 12, 2021 (mid-afternoon).
Emerging Markets Weekly Highlights
The Bolsonaro Administration edges closer to adjusting Brazil’s constitutional spending cap, targeting higher fiscal expenditures ahead of 2022 Presidential Elections
Event: This week, Congress’ lower house approved a constitutional amendment (known as PEC 23) designed to unlock BRL91bn (around $16.5bn) of additional fiscal spending in 2022.
Gramercy Commentary: The constitutional amendment will now go to the Senate where it appears to face challenging, but favorable odds of receiving final approval. Passing PEC 23 would be a win for the Bolsonaro Administration’s political wing, despite concerns by his economic team. Bolsonaro’s political advisors are betting that lifting the constitutionally mandated spending limits would be a useful tool to improve the President’s re-election chances against a resurgent former President Lula in what appears to be the most likely run-off scenario in next year’s Presidential Elections. However, in case constructing a constitutional majority in the Senate fails (i.e. three-fifths of senators in two rounds of voting), the government could use other mechanisms to boost spending ahead of the elections, including provisional measures to access extraordinary financing for the 2022 budget or even declaring a “public calamity”. Such strategies would be even more controversial from the standpoint of investors, so we expect the potential passage of PEC 23 to trigger some near-term market relief. This being said, any increase in public spending is a challenge in the context of Brazil’s stretched fiscal framework that was in a relatively weak position even before the COVID crisis. As such, the political outlook and its implications for economic policy and the fiscal trajectory beyond 2022 are likely to be the main drivers of market sentiment next year. Meanwhile, increasing fiscal spending risks in the context of double-digit inflation could prompt additional tightening of monetary policy by a hawkish BCB that has already delivered 575bps (to 7.75% from 2.0%) in SELIC rate hikes since February in an attempt to anchor inflation expectations.
South Africa’s Medium Term Budget Policy Statement (MTBPS) delivers on near term expectations
Event: The National Treasury released its annual MTBPS this week where it showed revised fiscal deficit assumptions for FY 21/22 of 6.6% of GDP compared to 9.9% of GDP last FY with the improvement largely due to an anticipated revenue overrun. Consolidation of 0.6% of GDP to a deficit of 6% of GDP is earmarked for FY 2022/23 with a growth rate assumption of 1.8%. The aim remains for a primary balance by FY 2024/25. As of now, debt to GDP is set to stabilize at 78.1% of GDP in 2025/26.
Gramercy Commentary: We see the statement as satisfactory from a short-term credit perspective and generally in line with market estimates given the better than originally budgeted fiscal performance this year, no inclusion of a basic income grant, and current intentions of future social support that only comes in the context of stronger fiscal conditions and revenue performance. While broader macroeconomic assumptions are reasonable, the ability for the authorities to execute as planned remains uncertain over the medium-term. There are downside risks from wage and social spending pressures particularly in the backdrop of ANC’s erosion of support in the recent local elections. The resilience of Ramaphosa’s recent power consolidation into next year’s NEC will be key in terms of the outlook for reform momentum and prospects for a more durable economic recovery. We expect minimal change to near-term issuance and see the MTBPS as neutral to marginally positive for local assets and credit.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of November 12, 2021.
COVID Resources
Emerging Markets COVID-19 Case Summary
Source: Worldometer as of November 12, 2021.
Additional Crisis Resources:
Johns Hopkins COVID-19 Case Tracker
For questions, please contact:
Kathryn Exum, CFA ESG, Senior Vice President, Sovereign Research Analyst, [email protected]
Petar Atanasov, Senior Vice President, Sovereign Research Analyst, [email protected]
Tolu Alamutu, CFA, Senior Vice President, Corporate Research Analyst, [email protected]
James Barry, Vice President, Corporate Research Analyst, [email protected]
This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.