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Contents
Market Overview
Macro Review
U.S. CPI inflation outstripped forecasts but was capped by soft PPI to end the week. Equities staged a recovery, core rates edged lower, volatility receded, and crude oil eventually rallied, with the U.S. Treasury auctions calming some fragility that built in the first week of the year. The Fed’s Mester was quick to cite that March is probably too soon for a rate cut and that a slowdown of quantitative tightening is not imminent. As Mester is a non-voter and soon-to-be-retiring, there is still some emphasis on Lorie Logan’s comments in that QT is in play for 2024 and the timing could follow the same timeframe as 2019. The Fed’s Williams noted that policy was restrictive enough to reach the 2% inflation target, but ought to remain sufficiently restrictive for some time. These comments were ignored as the market was quick to price in rate cuts again. The World Bank also published its Global Economic Perspectives report, highlighting that global growth is expected to fall to 2.4% in 2024, down from 2.6% last year. The SEC eventually made its landmark ruling in favor of the first-ever Bitcoin ETF, which helped spot prices rise to a 21-month high. Japan’s Nikkei surged above 35,000 and reached a 34-year high. Bangladesh’s Prime Minister Sheikh Hasina extended her 15-year rule, albeit through a boycotted election. Ecuador announced a state of emergency, Argentina received an IMF disbursement and Pakistan’s former Prime Minister returned from exile in the UK. We are also likely to see Chinese stimulus soon via a cut in the Reverse Requirement Ratio, which triggered its 30-year bond to hit an all-time low. It was also notable that the White House supported seizing Russian assets aimed at being used for Ukraine’s reconstruction. Finally, tensions escalated in the Red Sea to a new peak, yet only had a bearing on financial markets on Friday. Crude oil had only recovered on Friday having been underwater due to Saudi Arabia cutting prices for buyers in all regions, including its main Asia market.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week up 0.7% with credit spreads 1bp tighter. U.S. Treasury yields fell 3-12bps across the curve. Sovereign outperformers were Venezuela, Tunisia, and Ukraine, while Ecuador, Ethiopia and Papua New Guinea underperformed. Egypt will also be excluded from the JPM GBI-EM local currency suite of indices given issues around replicability of the index and FX convertibility. Needless to say, the focus remains on primary market issuance. EM issuance was $32bn this week. A second important theme after the smooth U.S. Treasury auctions was the strength in orderbooks of government bonds from Spain, Italy, and Belgium. Spain issued €15bn 10-year with a record orderbook of €138bn, which followed Italy’s 30-year orderbook of €91bn and Belgium’s 10-year orderbook of €75bn. There is clearly a very strong demand for sovereign bonds and the theme is also evident in Emerging Markets.
The Week Ahead
The key focus next week is the digestion of the Taiwanese election on Saturday. The U.S. could risk a foreign policy escalation in Taiwan as President Biden had already suggested sending a delegation to Taipei in the aftermath of the result. This will likely determine how markets trade early next week. The next direction of travel ought to be governed by U.S. retail sales and ECB minutes before CPI and jobs data out of the UK. China will also publish its 4Q GDP which will likely track 5.4%. Other Chinese data releases include industrial production, fixed asset investment and total social financing. Elsewhere, most releases focus on inflation out of Czech Republic, Israel, and Poland. The World Economic Forum then commences in Davos, just as 4Q earnings season ramp-up and Iowa caucuses take place. Congress will resume its session next week with debates on immigration, Ukraine/Israel aid, and the upcoming budget deadlines set to resume.
Highlights from emerging markets discussed below: Argentina secured IMF staff level approval for $4.7bn; $1.5bn of foreign bond payments made, Ecuador’s President Noboa declares “internal armed conflict” as authorities respond to domestic security crisis and Pakistan received $700mm IMF disbursement; Nawaz Sharif cleared to run for Prime Minister.
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 January 12, 2024 (mid-afternoon).
Emerging Markets Weekly Highlights
Argentina secured IMF staff level approval for $4.7bn; $1.5bn of foreign bond payments made
Event: The IMF and Argentine government announced a staff level agreement at the conclusion of the pending 7th review under the existing Extended Fund Facility program and an associated disbursement of $4.7bn. The Fund’s press release commended the new Administration’s strong commitment to fiscal adjustment, including a primary fiscal surplus target of 2% of GDP, and overall policy agenda to restore macroeconomic stability. Net FX reserve accumulation is estimated at $10bn including the $2.7bn gained in December following the devaluation. Targets are fully realigned to the new government’s program. Separately, Argentina paid roughly $1.5bn in euro and dollar bond payments this week.
Gramercy Commentary: The resumption of the IMF program is a positive development and reflects the authorities’ commitment to pragmatism and shock therapy. The disbursement of funds upon board approval will cover the government’s upcoming January and April repayments to the Fund as well as the loan from CAF utilized for IMF payments in 4Q23. A new review will commence in the spring, at which point the door remains open, in our view, for fresh financing or a new program, if the Argentine authorities are able to effectively deliver on their policy agenda. Meanwhile, the completed bond payments are indicative of a strong willingness to pay given the still very strained level of net FX reserves.
Ecuador’s President Noboa declares “internal armed conflict” as authorities respond to domestic security crisis
Event: President Daniel Noboa imposed a state of emergency and declared a “domestic armed conflict” against organized crime groups amid a wave of gang violence that swept across the country this week. The army was called into the streets and police were given extraordinary prerogatives to control the situation.
Gramercy Commentary: Ecuador’s 36-year-old President was elected back in October on a platform that prioritized combatting organized crime and reversing a sharp deterioration in law and order observed during the last months of the previous administration. As such, the current escalation in domestic violence is both a threat and an opportunity that is likely to define Noboa’s Presidency. If the authorities fail to control the situation in due course and improve the average voter’s sense of security, Noboa is likely to lose political capital and jeopardize his chances to get reelected in the next regular elections scheduled for early 2025. On the other hand, there has been an unprecedented show of support for the government and calls for “national unity” by all political forces that should improve near-term governability and could facilitate implementation of Noboa’s ambitious reform agenda. Additionally, the U.S. and other external allies have reiterated their strong commitment to supporting Ecuador, including by providing additional financial and security assistance.
Pakistan received $700mm IMF disbursement; Nawaz Sharif cleared to run for Prime Minister
Event: This week, the IMF board approved the first review of the 9-month SBA and disbursed $700mm to the Pakistani government. This follows the staff-level agreement on the review that was reached in November. Earlier in the week, Pakistan’s Supreme Court scrapped the lifetime ban on contesting elections for people with criminal convictions which paved the way for former Prime Minister Nawaz Sharif to run in the upcoming February elections.
Gramercy Commentary: The IMF inflow is constructive for the near-term balance of payments and confirms that Pakistan’s caretaker government is committed to executing the FY24 budget, particularly with the energy price adjustments last quarter. Going forward, the focus will shift to electoral dynamics with the general election scheduled for February 8th and a new IMF review set for March. Sharif’s likely candidacy shows support from the military and should bode well for further IMF policy coordination. While Khan’s imprisonment and lack of ability to run leaves the risk of social unrest elevated, the likely military alignment with Sharif and fear of crackdown should be mitigants.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of January 12, 2024.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
James Barry, Director, Deputy Portfolio Manager, [email protected]
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