Contents
Market Overview
Macro Review
Markets continued to obsess over presidential polling, VP candidates and the shape of the U.S. Treasury curve. The first two items are well-telegraphed, but the latter saw the 2s10s curve steepen to its least inverted level since July 2022. The 2s30s curve also turned positive. There were several dominant factors from a weak Treasury buyback of 7-10-year bonds to a weak 5-year U.S. Treasury auction. However, markets contended with higher retail inventories and new homes sales as PMIs were mixed. The pressure on equities was notable without any respite from a stronger U.S. 2Q GDP reading. Earnings from LVMH, Kering, American Airlines and UPS were key market movers, just as Tesla recorded its worst daily performance since September 2020 when it declined 12.3% on Wednesday. In macro more broadly, the risk-off tone continued with JPY strengthening sharply, more China rate cuts didn’t help and copper fell below $9k/t with iron ore below $100/t. On China, the PBOC unexpectedly trimmed the seven-day reverse repo rate for the first time in almost a year, lowering it by 10bps to 1.7% to reinvigorate the economy. The 1-year and 5-year loan prime rates were also cut by 10bps each to 3.35% and 3.85%. The PBoC followed this decision by cutting the 1-year medium-term lending rate by 20bps on Thursday to 2.3%. Chinese authorities also told state banks to extend support to ensure some of the nation’s most indebted municipalities can refinance through mid-2027. Other EM events were focused on Brazilian fiscal forecasts, India’s budget and Argentina’s Milei claimed that the country has the funds to cover the 2025 dollar obligations and that debts would be paid “no matter what”. Moody’s upgraded Turkey and 17 domestic banks, just as the Central Bank kept interest rates unchanged at 50% but did suggest that inflation could temporarily rise in July. Venezuela’s moment of reckoning comes as soon as Sunday with elections.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week flat with credit spreads 2bps wider. Sovereign outperformers were Ukraine, Tajikistan, and Jamaica, while Sri Lanka, Gabon, and Pakistan underperformed. Ukraine published its sovereign restructuring proposal earlier in the week. It was a far simpler iteration of the original proposal with a principal haircut of 37% relative to the IMF guidance of 52% initially. The contingent bonds are straightforward and should be index eligible but also include a loss reinstatement feature, which increases the principal by 12% under certain conditions.
The Week Ahead
Central banks are in focus next week with several rate decisions. The main market-moving events will likely be from the Federal Reserve, Bank of England and Bank of Japan. Other key data releases include U.S. JOLTs, China’s NBS PMI, and U.S. PMIs before U.S. non-farm payrolls on Friday. Key EM interest rate decisions are due from Brazil (10.5%), Chile (5.75%), Pakistan (20.5%) and Russia (16%). Another EM events include the Venezuelan election on Sunday. Corporate 2Q earnings are also in full throttle with 40% of the S&P, 45% of the Nasdaq and 38% of the Russell reporting next week.
Highlights from emerging markets discussed below: China delivers two moderate rate cuts; state banks extend support to LGFVs and Turkey’s Central Bank holds rates at 50% and maintains hawkish bias; Moody’s delivers a 2 notch upgrade to the sovereign credit rating.
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 July 26, 2024 (early-morning).
Emerging Markets Weekly Highlights
China delivers two moderate rate cuts; state banks extend support to LGFVs
Event: This week the PBoC reduced its seven-day repo rate by 10 bps to 1.7% and its rate of the medium-term lending facility by 20bps to 2.3%. On Sunday, the CCP (Chinese Communist Party) released its more detailed ‘decisions’ document from the Third Plenum, which, in part, attempted to address local Government fiscal pressure to shift the structure of fiscal accounts over time with the central Government accounting for a greater share of fiscal expenditures and diversifying local Government revenues. At the same time, state banks were ordered to extend support to strained LGFVs (Local Government Financing Vehicles) through 2027 to reduce liquidity pressure.
Gramercy Commentary: The rate adjustments, plenum takeaways and LGFV policy are aligned with the authorities’ approach to easing thus far this year, which entails moderate adjustments and short-term policy measures short of any bazooka stimulus or structural policy shift. In the near-term, we see room for further rate cuts and additional similar policy with the upcoming Politburo meeting as a next signpost. Over the medium-to-long-term, the jury is still out on evolution of the structure of the economy and the specifics of property sector resolution and local Government stress.
Turkey’s Central Bank holds rates at 50% and maintains hawkish bias; Moody’s delivers a 2 notch upgrade to the sovereign credit rating
Event: This week, the Turkish Central Bank (CBT) kept its main interest rate, the 1-week repo rate, unchanged at 50% and maintained a hawkish forward guidance. Meanwhile, Moody’s upgraded the sovereign credit rating by 2-notches to B1 from B3 and maintained a positive outlook, citing improvements in governance and more specifically the “decisive and increasingly well-established return to orthodox monetary policy”.
Gramercy Commentary: A 2-notch upgrade and maintaining a positive outlook is not a rating action that is seen frequently and recognizes the impressive turnaround in Turkey’s macroeconomic policy management under the guidance of Finance Minister Mehmet Simsek and CBT’s leadership teams. It also corroborates our constructive view on the “Simsek pivot” expressed in our EM weekly comments over the last twelve months and associated positive impact on the sovereign credit trajectory, especially in terms of local-currency assets. We expect this narrative to be reinforced further during the second half of the year as disinflation takes hold (after a likely “temporary uptick in July” as flagged by the CBT) and the monetary policy retains its tightening bias, in our view. Importantly, the macro normalization/inflation fighting program spearheaded by Mr. Simsek and Mr. Fatih Karahan, CBT’s Governor, continue to enjoy strong support by President Erdogan. In the context of a rare political period of four years without elections, we expect the President’s support to remain unchanged—a credit positive.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of July 26, 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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