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Contents
Market Overview
Macro Review
Recent data confirms U.S. exceptionalism and offered further evidence of a no landing scenario. A stronger NFP that was well ahead of expectations, coupled with strong ADP, JOLTS, ISM Manufacturing and Factory Order data pushed U.S. Treasury yields higher and priced-out a full rate cut in July that was instead shifted to September. The market is now pricing in 67bps of cuts this year versus the 167bps it was pricing in early January. Equity volatility also rose considerably with the VIX at a five-month high and the S&P 500 had its worst weekly performance since October. Copper may have traded to its highest level in 14-months and benefited from better Chinese data as the Caixin PMI of 52.7 rose to a ten-month high. For different reasons, crude oil rose to a high of $91/bbl, pricing that we have not seen since October. Geopolitical risks spiked over the past week. However, oil markets began this year close to two-year lows, but the commodity is now up 20% year-to-date. Regardless, there is now an inflationary impulse from commodities as OPEC+ extended production cuts to June and gold also hit an all-time high. This put upward pressure on five-year U.S. inflation swaps which moved up to 2.60%, where the correlation to crude oil remains exceptionally strong. Across EM, and in particular across Asia, the earthquake in Taiwan had very limited repercussions; Pakistan edged closer to an IMF agreement; and India’s manufacturing PMI was notably strong at 59.1, which is the strongest PMI since 2008. Across CEEMEA, Israeli developments remained center-stage; Turkey’s surprising election result showed the main opposition (CHP) won main cities and Anatolian provinces that were previously AKP strongholds; and Senegal’s newly elected President named Ousmane Sonko as the country’s new Prime Minister. Finally, across LATAM, Chile’s Central Bank cut interest rates by 75bps; diplomatic relations between Argentina and Colombia soured; and the market reacted to the Fitch downgrade of Panama from IG to HY.
EM Credit Update
Emerging markets sovereign credit (cash bonds) ended the week down -0.2% with credit spreads 5bps tighter. Sovereign outperformers were Argentina, Ecuador and Zambia, while Ukraine, Ethiopia and Bolivia underperformed.
The Week Ahead
Other than the solar eclipse that U.S. readers will be eagerly awaiting, the main events of next week cover FOMC minutes, U.S. CPI and the ECB rate decision. The Bank of Canada rate decision is also due next week. Across EM, key interest rate decisions are due out of Kenya (13.0%), Nigeria (24.75%), Peru (6.25%), Philippines (6.5%), South Korea (3.5%) and Thailand (2.5%). Other EM inflation releases are then due out of Argentina, Brazil, Chile, China, India and Mexico. Toward the end of the week, 1Q 2024 earnings season will begin with U.S. banks.
Highlights from emerging markets discussed below: Outcome in Turkey’s local elections is good news for economic policy and markets, Senegal election outcome delivered decisive victory for the opposition, and Zambia bondholder deal reached with endorsement from IMF and China.
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 April 5, 2024 (late-morning).
Emerging Markets Weekly Highlights
Outcome in Turkey’s local elections is good news for economic policy and markets
Event: President Erdogan’s ruling AK Party suffered a significant political blow in the local elections on Sunday, March 31, losing all major cities and garnering the lowest share of the nation-wide popular vote in decades.
Gramercy Commentary: While the results in the local elections can be characterized as a major political defeat for President Erdogan’s ruling party, we strongly disagree with some analysts’ interpretations that this outcome could jeopardize macroeconomic policy normalization under Minister of Finance Mehmet Simsek’s leadership. We believe the opposite to be true: the pivot back to orthodox economic policy management is not only likely to continue, but could get even more ambitious and credible. We are of the view that President Erdogan is likely to recognize that the “red flag” in the local elections comes on the back of high inflation and falling living standards, the product of his pre-June 2023 (i.e. the last presidential elections) heterodox economic policy mix that he has abandoned in favor of a U-turn toward economic orthodoxy. This should support an even stronger mandate going forward for Minister Simsek and the Central Bank of the Republic of Turkey to guide the Turkish economy away from the inflation quagmire that was clearly the key driver in last Sunday’s protest vote. With political event risk now in the rear-view mirror, the authorities have a rare period of four election-free years that offer a unique window of opportunity to address the major macro imbalances, re-anchor inflation expectations and put Turkey’s dynamic economy on a sustainable growth path. This would be a win-win development from both a political and market perspective.
Senegal election outcome delivered decisive victory for the opposition
Event: Following the delay from February 25th, Senegal held its presidential election on March 24th. . Opposition candidate Bassirou Diomaye Faye secured 54% of the vote compared to the ruling party candidate Amadou Ba, who obtained 36% of the vote, eliminating the need for a second-round election. Ba conceded swiftly in the aftermath and Faye was sworn in on April 2nd.
Gramercy Commentary: The smooth transfer of power after prolonged uncertainty over the extension of Sall’s term and an ultimate election date was welcomed. Ousmane Sonko, who was banned from running, will likely have an atypically powerful role as Prime Minister. In the near-term, uncertainty over the ultimate policy agenda persists absent details on cabinet composition and a timeline of the upcoming IMF program review. While Faye has already announced an audit of oil and mining agreements to ensure they optimize the state benefit, he reiterated continuation of an open stance to foreign investment in the country and industry.
Zambia bondholder deal reached with endorsement from IMF and China
Event: On March 25th, authorities announced a long-awaited agreement on its Eurobond restructuring with only minor changes to the terms agreed in 4Q23, maintaining an upside treatment in the case that Zambia’s future debt carrying capacity improves. The government received confirmation that the terms are compatible with the Official Creditor Committee’s assessment of comparability of treatment and compatible with the IMF’s program parameters. Bondholders will forego $840mm of their claims and provide $2.5bn of cashflow relief during the IMF program period.
Gramercy Commentary: We see the news as constructive as Zambia’s restructuring has been ongoing since October 2020. In contrast to the low coupon and concessionary-like restructurings in Ecuador and Argentina, the cashflow structure and higher coupons along with an upside component bodes well for near-term restructuring outcomes, even if direct parallels cannot be made.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of April 5, 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]
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. References to any indices are for informational and general comparative purposes only. The performance data of various indices mentioned in this update are updated and released on a periodic basis before finalization. The performance data of various indices presented herein was current as of the date of the presentation. Please refer to data returns of the separate indices if you desire additional or updated information. Indices are unmanaged, and their performance results do not reflect the impact of fees, expenses, or taxes that may be incurred through an investment with Gramercy. Returns for indices assume dividend reinvestment. An investment cannot be made directly in an index. Accordingly, comparing results shown to those of such indices may be of limited use. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.