Contents
Market Overview
Macro Review
The ECB cut policy rates by 25bps with the deposit rate now at 3.25%. It’s the first back-to-back rate cut of this cycle, as they previously moved at a quarterly pace in June and then September. As a reflection of risk sentiment, the Italian 10-year spread over German bunds reached its tightest level since November 2021 (120bps). Other developments saw UK and New Zealand inflation fall well below expectations, which was a risk factor expressed by President Lagarde for the Eurozone. The U.S. economy shifted into a ‘no landing’ scenario with the Atlanta Fed’s GDPNow pointing to annualized growth of 3.4% in 3Q. The market was also pricing-in “Trump trades” as betting odds increasingly favored him by 10ppts over Kamala Harris. However, markets will have to tackle any growth concerns should Trump’s favorite word in the dictionary (“tariffs”) become actively used as part of a protectionist agenda. Nevertheless, the Dow Jones moved to a new record high last week and U.S. IG spreads closed at the tightest level since 2005. The question mark over safe-haven assets continued to add an element of doubt as gold reached another all-time high of above $2,700/oz and the dollar rose to its highest level since August. Local Chinese media built-up expectations of RMB6tn of ultra-long special government bonds as part of its fiscal stimulus, relative to a prior rumor of RMB2tn. Separately, the main headline last week was the increase in the white-list project loans to RMB4bn from RMB2.23bn that ought to be deployed by year-end. There was a sense that the Chinese stimulus measures fell short of expectations, but more is expected with the upcoming National People’s Congress. As of result and with Chinese inflation falling below expectations, there was some softness in commodities with crude oil some 8% lower over a two-week period. This coincided with OPEC forecasting lower global oil demand, just as Zelensky presented Ukraine’s “Victory Plan” and tensions in the Middle East appeared to simmer. We attribute this to Israel dialing back initial suggestions that they may strike Iranian oil or nuclear facilities. To that end, Lebanese sovereign bonds traded up to new highs this week.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week up +0.2% with credit spreads 17bps tighter. Sovereign outperformers were Ghana, Sri Lanka and Bolivia, while Ecuador, Suriname and Angola underperformed.
The Week Ahead
The IMF meetings in Washington DC usually lead to a quieter week. However, after a series of Chinese policy easing measures, there is a high probability that the one-year and five-year Loan Prime Rates will be cut next week. The PBoC guided as much on September 24th. Elsewhere, expect some focus on the Bank of Canada which is expected to cut rates by 50bps. Commentary from the National Bank of Hungary’s Deputy Governor almost fully confirms that the Central Bank will pause the easing cycle. Inflation releases are due out of Malaysia and Singapore. The strength in the South African rand and easing food inflation likely slowed September headline CPI to 3.8% y/y. This adds more fuel to the debate around the SARB lowering the inflation target, but the next risk event is on October 30th with MTBPS.
Highlights from emerging markets discussed below: China expands existing measures for property sector, President Zelensky’s “Victory Plan” confirms Ukraine’s pre-conditions for peace remain polar opposite to Russia’s, and Egypt and Saudi announce new investments while Central Bank of Egypt (CBE) held rates.
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 October 18, 2024 (early-morning).
Emerging Markets Weekly Highlights
China expands existing measures for property sector
Event: The press conference held by the Ministry of Finance (MOF) over the weekend and joint press conference with MOF, PBOC and MOHURD (Minister of Housing and Urban-Rural Development) on Thursday delivered additional stimulus signals and commitments. The most notable development is the new RMB 2 trillion in loans for stalled housing projects, set to bring the total loans for the year to over RMB 4 trillion.
Gramercy Commentary: The developments are in line with expectations for a ‘step-up’ in reactive stimulus measures in response to weaker growth and the evolving external backdrop but remain short of a big-bang approach. In our view, the frequent press conferences reflect a growing recognition and need to push more support but are shy of a deep policy pivot that fully addresses cyclical or structural weaknesses. We see room for continued ‘step-ups’ in policy measures between now and year-end with a close watch on the Standing Committee meeting later this month or early next month and the Central Economic Work Conference at year-end for initial 2025 guidance.
President Zelensky’s “Victory Plan” confirms Ukraine’s pre-conditions for peace remain polar opposite to Russia’s
Event: President Volodymyr Zelenskiy presented to the Rada, Ukraine’s Parliament, his so called “Victory Plan” that he has previously discussed in private with allies in Europe and the U.S.. The plan outlines Zelenskiy’s vision of the pathway toward achieving “a fair peace” with Russia and rejects any ceasefire/peace talks until such conditions are met.
Gramercy Commentary: The contents of Zelenskiy’s plan signals that a potential “beginning of the end” to the military conflict in Ukraine unfortunately remains a remote possibility over the foreseeable future. The key pillars of the plan include elements such as an immediate invitation for Ukraine to join NATO with the prospect of actual membership “at some point in the future” as well as explicit permission to use long-range weapons provided by allies to strike targets deep inside Russia, among others. Given lukewarm reception of these or similar ideas in Western capitals until now, we think such aspirations by Ukraine’s leadership remain unrealistic. Additionally, they remain in stark contrast to the Kremlin’s own objectives in the conflict. As things stand, we do not see grounds and incentives for any of the two sides to edge closer to the negotiating table. The already challenging military, economic and geopolitical context for Ukraine as we transition into 2025 could be further complicated by the outcome of the upcoming U.S. Presidential and Congressional elections and potential shifts in U.S. and European policy on the conflict.
Egypt and Saudi announce new investments while Central Bank of Egypt (CBE) held rates
Event: Saudi and Egyptian authorities announced new investment agreements of $15bn, coming on the heels of a $5bn announcement last month. On the monetary front, CBE held rates at 27.25% following last week’s moderately higher than expected CPI print as well as escalating geopolitical tensions in the region.
Gramercy Commentary: The additional regional commitments coupled with cautious monetary policy in the wake of an uncertain geopolitical backdrop and still strained current account help to anchor the overall balance of payments and policy commitments under the current IMF program. Performance under the upcoming 4th review on June-end criteria will be in focus for investors at the upcoming Fall IMF Meetings.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of October 18, 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.