Contents
Market Overview
Macro Review
The U.S. job market added 227,000 nonfarm payrolls in November, rebounding from the storm and strike related disruptions in October. However, the overall unemployment rate ticked marginally higher to 4.2%, and investors saw some signs of potential labor market weakness in the underlying data details, which pushed the market probability of a December Fed cut higher. The market reaction somewhat contradicted Fed Chair Powell’s upbeat take on the U.S. economy earlier in the week when he signaled that Fed policymakers are not in a hurry to bring rates lower. U.S. stocks and treasuries rallied, while the USD retracted slightly. Across the Atlantic, the political temperature increased dramatically this week as the Michel Barnier cabinet fell to a non-confidence vote in the French parliament supported by both far-right and far-left parties. In a speech to the nation, embattled President Macron vowed not to step down, committed to finishing his term which doesn’t end until 2027 and will attempt to appoint a new Prime minister and cabinet in the “coming days”. Signals by the opposition about openness to work with the next Government if it is less aggressive on fiscal austerity eased market concerns, driving French treasury spreads lower. Across EM, Romania attracted attention as the Constitutional Court ordered a rerun of the Presidential elections first round amid evidence of “foreign power” meddling with the results. In Panama, the Mulino Administration’s social security reform continued to face political headwinds. In neighboring Colombia, Minister of Finance Ricardo Bonilla resigned amid a raging corruption scandal and was promptly replaced by President Petro with his deputy, Diego Guevara, a respected technocrat.
EM Credit Update
Emerging market sovereign credit (cash bonds) gained 0.4% with spreads 3bps tighter at the index level. Sovereign outperformers were Papua New Guinea, Romania and Iraq, while Namibia, Tajikistan, and Georgia underperformed. Corporate credit was 0.2% higher with spreads 1bp tighter. EM local debt also added 0.2% this week.
The Week Ahead
November CPI in the U.S. and ECB’s interest rate decision will be in focus in DM. In China, the big event next week will be the annual Central Economic Work Conference, which could provide markets with some sense of how Beijing policymakers plan to approach economic management next year. Across the Himalaya mountains in India, investors will await the November CPI print to see if inflation is falling back to RBI’s target range, after spiking above 6% last month, a 14-month high. In Brazil, the BCB will be deciding on the SELIC rate; market consensus expects a 75bps hike amid the latest BRL sell-off and overarching fiscal concerns.
Highlights from emerging markets discussed below: Panama needs to show fiscal and reform progress in 2025 to avoid losing IG status, Colombia’s FinMin steps down amid a corruption scandal, and Romania election uncertainty lingers.
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 December 6, 2024 (early-morning).
Emerging Markets Weekly Highlights
Panama needs to show fiscal and reform progress in 2025 to avoid losing IG status
Event: Last week, S&P and Moody’s, the two major rating agencies that rate Panama’s government debt as Investment Grade (IG), took negative rating actions on the sovereign. S&P downgraded its rating from BBB to BBB- with a stable outlook. Meanwhile, Moody’s placed its Baa3 rating on negative outlook, citing a larger-than-expected deterioration in the fiscal balance in 2024 and significant hurdles to deliver rapid fiscal consolidation. This signals that the next step could be stripping Panama of the coveted IG rating that the sovereign regained in 2010.
Gramercy Commentary: From a market perspective, the negative rating actions by S&P and Moody’s have two interpretations. On the positive side, the sovereign has avoided a downgrade by a second rating agency for the time being and likely has next year to “put its fiscal house in order” to avoid further downgrades. On the negative side, in the absence of tangible fiscal and reform progress over the next few quarters, it seems likely that Moody’s could join Fitch in moving the sovereign to sub-IG territory. The market has already priced-in a potential loss of IG by Panama as the sovereign has been trading wide of the BB-rated sovereign median for some time. As such, taking the necessary policy steps to avoid a downgrade should catalyze a recovery in asset prices next year, while further downside from so called “forced selling” by accounts that cannot hold HY-rated sovereign bonds could materialize if it looks increasingly likely that the loss of IG is becoming imminent.
Colombia’s FinMin steps down amid a corruption scandal
Event: Ricardo Bonilla stepped down as Colombia’s Finance Minister amid increasing pressure stemming from corruption allegations against him. Colombia’s President Gustavo Petro promptly replaced Bonilla with Diego Guevara, who previously held the position of Finance Vice Minister.
Gramercy Commentary: We see Guevara’s appointment as neutral to slightly positive from a credit perspective. Mr. Guevara has a strong technocratic reputation and is likely less prone to political noise than his predecessor, which will be welcomed by markets. His appointment also signals general policy continuity and alleviates concerns about a less market-friendly person taking over the position. In addition, Guevara seems to enjoy a good working relationship with Congress, which should prove beneficial in the coming weeks with the negotiations over the 2025 budget pending. Colombia’s fiscal outlook will be the key market focus as investors evaluate Colombia’s sovereign credit prospects heading into the new year. Embattled President Petro’s Administration has been in gridlock with lawmakers over proposals to raise taxes and avoid sizable expenditure cuts that are needed to comply with the Government’s fiscal rule amid revenues trending below expectations this year. As such, unless new Finance Minister Guevara is successful in working out a compromise in Congress, the Petro Administration is likely to face politically painful expenditure reduction decisions in the near future.
Romania election uncertainty lingers
Event: On November 24th, Romania held its first round Presidential vote where far-right independent candidate, Calin Georgescu secured the most votes at 23%, followed by liberal USR candidate, Elena Lasconi with 19% support. On December 1st, the parliamentary vote saw the largest and center-left PSD party secure the most seats at 22% and overall pro-EU parties secure roughly 60% of seats. The far-right made significant gains with the AUR obtaining 18% of seats with another 5% from smaller parties. On the back of investigation of Russian influence in Georgescu’s surprise win, the Constitutional Court annulled the 1st round Presidential vote, cancelled this Sunday’s runoff race and called for new 1st and 2nd round dates to be set.
Gramercy Commentary: The outperformance of Georgescu and far-right parties was widely unanticipated and adds Romania to the increasing list of political surprises. The annulment and restart of the Presidential vote process gives further rise to uncertainty over government formation and timing, given that the President appoints the PM and is a key driver in the government formation process. Candidates must reregister with a possibility that major incumbent coalition parties PSD and PNL put forth fresh faces. Elections will likely be pushed to 1Q. The strength of pro-EU parties in the parliamentary vote remains a positive factor but still with room for a bumpy process and associated market volatility. Ultimately, the new Government will need to put forth an improved fiscal path to secure EU funds and avoid negative rating pressure.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of December 6, 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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