Contents
Market Overview
Macro Update
This week, markets were primarily focused on President Trump’s inauguration and clues on policy action. Based on the new Administration’s comments and early executive orders, U.S. energy independence and immigration are clearly at the top of the agenda.
Notwithstanding President Trump’s comments on 25% tariffs on Mexico and Canada and 10% on China starting as early as next month, the details of the Administration’s trade policy remain uncertain, especially with the President having adopted a softer tone by the end of the week. This contributed to the rally in U.S. equities (S&P up 2%) and the retreat of the U.S. dollar from recent highs (the DXY Index dropping 1.8% to 107.4).
In the fixed income markets, yields on the 10-year government bond traded in a relatively contained range, ending the week at 4.62%. Oil prices fell, with the WTI Index down 4.4% week-over-week, triggered by an increase in U.S. inventories and President Trump’s pledge both to “drill, baby, drill” and to pressure OPEC for lower prices.
In geopolitics, President Trump’s overture to Russia for a peace deal in Ukraine attracted global focus. While the path to peace remains complicated, an end to the war would be a huge relief for Ukraine and Europe. Elsewhere, Saudi Arabia’s Crown Prince Mohammed Bin Salman told President Trump that his country is willing to increase investments and trade with the U.S. by USD 600bn.
In terms of economic data, U.S. Composite PMI eased to 52.4 and missed expectations, led by a weaker-than-expected services sector, while the Eurozone Composite PMI ticked up into expansionary territory at 50.2, with improvements in Germany and France.
China kept prime rates on hold this week (in line with consensus), Japan hiked rates by the expected 25 bps, and the Central Bank of Turkey cut its one-week repo rate by 250bps, also as expected. South Africa and Mexico inflation rates were lower than anticipated, while Brazil’s eased but exceeded consensus estimates.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week up +0.3% with credit spreads 5bps tighter. Emerging market corporate credit also ended the week up +0.1% with credit spreads tighter by 3bps. Sovereign high yield bonds performed the best during the week, with a 0.5% return driven by spread tightening of 10bps.
For corporates, investment grade and high yield performed in line with the larger spread compression in the investment grade segment, offsetting the slight move wider in rates.
Ukraine was the outperformer of the week, supported by President Trump’s comments to Russia on the need to stop the war, while Gabon also rallied on the announcement that presidential elections will be held there on April 12th. Angola was a laggard, driven by a report rehashing old news that a loan arbitration had been initiated by a creditor, as well as lower oil prices. In Mozambique, fiscal pressures weighed on performance.
On the new issue front, it was a busy week for EM corporates with nine deals pricing across three regions. The Philippines and Lithuania were the only EM sovereign issuers this week. Bond issues this week continue to be priced at fair value, with significant tightening from initial price guidance. Performance in the secondary debt markets has been mixed, with most new issues wrapped around reoffer. Next week promises to be another busy week, with five corporate mandates already announced.
The Week Ahead
The Fed’s FOMC, which meets on January 29th, is expected to keep rates on hold. Markets will be watching U.S. data releases on housing, durable goods and consumer confidence ahead of the decision, and 4Q GDP figures, core PCE and ECI data later in the week.
In Europe, the German Ifo business survey and 4Q Eurozone GDP will be released ahead of the ECB meeting on January 30th, during which the ECB appears set to continue its 25bps cutting cycle.
In China, little change is expected out of NBS PMI data next week ahead of the start of the Lunar New Year holiday mid-week. EM central banks in Chile, Hungary, Brazil, South Africa and Colombia will meet, and there is an 100bps hike expected in Brazil.
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 24, 2025 (mid-day).
Country Highlights
Peace Deal in Ukraine Appears Unlikely, Given Russian Objectives
Event: In his first week back in the White House, President Trump warned President Putin on social media to “make a deal” to end the war in Ukraine or face tougher financial penalties and sanctions by the U.S.
Gramercy Comment: President Trump suggested during his campaign that, if elected, he could end the war in Ukraine “in one day”, a timeframe that has been subsequently revised by his team to “within six months”. While clearly more realistic, we think that even the latter timeframe remains optimistic and the chances of achieving a peace or ceasefire deal in Ukraine in the near-term remain slim.
We think it will be much more complicated to bring Russia to the negotiating table over Ukraine than President Trump seems to believe, and threats of further financial penalties are unlikely to do much to sway the Kremlin’s behavior. Given that Russia appears to be enjoying the upper hand on the battlefield recently and that the passage of time is likely to work in Russia’s favor, we think it is highly unlikely that Putin rushes into peace talks soon.
However, we do expect that the Kremlin will continue to say it is “ready for dialogue” with the U.S. while ignoring Ukraine and Europe in potential negotiations. More importantly, even if we are not correct in our assessment and peace negotiations do take place, we expect that they will likely be torpedoed by maximalist Russian conditions. Overly harsh demands could be difficult for even a friendlier Trump Administration to swallow, let alone for Ukraine and/or Europe.
In sum, we take the view that the Ukraine war is likely to drag on for longer than the market seems to expect, and that excessive market complacency and optimism about Ukraine’s medium-term economic prospects is built into current sovereign bond valuations.
Mexico and China Initial Tariff Signals Are Unsurprising – For Now
Event: President Trump has announced the possibility of a 25% tariff on imports from Mexico and Canada, as well as an additional 10% tariff on imports from China. This coincided with the release of the ‘America First Trade Policy’ memorandum which called for review of unfair trade practices, establishment of an External Revenue Service, preparation for the USMCA review, exchange rate practices, and broader trade agreement reviews, as well as an assessment of unlawful migration and fentanyl flows particularly from Mexico, China and Canada. Later in the week, President Trump indicated he would prefer not to impose additional tariffs on China.
Gramercy Comment: The initial tariff considerations align with President Trump’s campaign rhetoric and therefore, are not overly surprising from a market perspective. For now, the cordial and more dovish tone between President Trump and Chinese leader Xi is welcomed by markets and is boosting speculation around lower tariff risks. We think some form of new tariffs remains likely. However, Chinese authorities plan to scale-up domestic economic support this year, and this should at least partially offset the negative growth impact from any tariffs, as would new deals with the U.S.
In Mexico, Claudia Sheinbaum’s comments and actions have suggested a firm but cooperative stance. Plan Mexico, which was presented last week, entails initiatives and incentives to attract FDI and nearshoring operations to bolster domestic production and reduce imports from China. While we think agreements will likely be struck over migration and fentanyl, the process could be lengthy, since components of the USMCA review may be brought into these discussions. In the context of weaker growth, we anticipate continuation of Banxico’s easing cycle, as foreign-exchange pass-through to inflation so far remains contained.
Ecuador Holds Presidential Debate, Market-Friendly Noboa Remains Frontrunner
Event: In the only nationally televised debate ahead of the first round of Presidential elections on February 9th, the 16 candidates were divided into two groups. The two main candidates, Daniel Noboa, incumbent President and market favorite, and Luisa Gonzalez, ally of exiled former President Rafael Correa, did not debate directly because they were in different groups. As expected, the debate focused on fighting crime and the economy, but Noboa and Gonzalez’s performances do not seem to have had material impact on voter preferences.
Gramercy Comment: President Noboa continues to lead in the more credible polls. His election win appears to be a strong base case, likely after a head-to-head second round runoff against Ms. Gonzalez in mid-April. The electricity crisis in Ecuador has eased materially and the economy continues to perform better than expected, which supports Noboa’s re-election prospects.
Meanwhile, the populist/leftist opposition appears to have prioritized loyalty to Correa, who has been in exile in Belgium since 2017, which has also played in favor of Noboa. In addition to having the upper hand in the Presidential elections, Mr. Noboa seems likely to have a better working relationship with the National Assembly, and in a new mandate, his party and other allies are projected to gain more representation in the legislature. This bodes well for a strengthening of the reform agenda post-election and for continued cooperation with the IMF.
Unless there is a significant downside surprise, we expect this favorable political and economic outlook, combined with still attractive valuations, to propel Ecuador’s sovereign bonds to another year of strong returns.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of January 24, 2025.
For questions, please contact:
Simon Quijano-Evans, Managing Director, Chief Strategist, [email protected]
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
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