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Contents
Market Overview
Macro Review
The Fed is now in a difficult position. A stronger U.S. dollar is the base case as interest rate cuts fade. Barclays were the first to reduce their expectations to just one cut in 2024, which was followed by Bank of America economists. The dramatic sell-off on Wednesday after U.S. CPI saw the 10-year U.S. Treasury yield move to its highest level since November. In fact, in the aftermath of the U.S. inflation report, yields on the U.S. Treasury curve saw the sixth highest daily move over the past decade. In opposing fashion, the ECB are still guiding toward a June cut. The dovish members of the ECB Committee have been very vocal in this regard, and it is has triggered the renewed round of USD strength after the higher U.S. inflation reading (weighing on JPY in particular). Emerging markets continued to tread water in response to Israeli and Iranian tensions. Such geopolitical concerns led to gold reaching an all-time high, and gold is now up 15% in 2024. Another feature is Chinese inflation only rising by 0.1% as the narrative shifts to deflationary pressures, not helped by a deeply negative PPI print. Ukrainian assets also remained in focus after Russia targeted Naftogaz and Centernergo facilities, which pushed European natural gas prices up 8%. Ukraine was still a top outperformer this week as the U.S. House of Representatives is expected to vote on Ukrainian aid next week. Elsewhere, the Peru Central Bank delivered a shock with a 25bps interest rate cut as only 1 of 13 in the survey forecasted such a change. Finally, South Korean elections were a non-event as the main opposition party (Democratic Party of Korea) won 176 out of 300 seats in the National Assembly, as was very much expected.
EM Credit Update
Emerging markets sovereign credit (cash bonds) ended the week down -0.9% with credit spreads unchanged. Sovereign outperformers were Ukraine, Zambia and Namibia, while Ethiopia, Sri Lanka and Tunisia underperformed. El Salvador issued a 6-year bond at 9.25% at a discount, meaning a 12% yield-to-maturity, in conjunction with a warrant. The warrant has the same 6-year tenor but is conditional on an IMF program within 18-months. If an IMF deal is secured or credit ratings are upgraded to single B by two or more agencies within that period, then the coupon remains at 0.25% through the life of the bond. In the absence of an IMF program or rating upgrades, the coupon steps-up to 4.0% beginning in April 2026. With no principal maturity, this warrant is priced as a coupon strip between 1ct and 9cts.
The Week Ahead
The main EM event next week rests with IMF and World Bank spring meetings in Washington D.C. Data out of Europe is focused on UK and Euro-Area HICP inflation, which are key dependents ahead of June MPC meetings. Across China, the one-year MLF rate is expected to remain unchanged, but more focus will be on Chinese 1Q GDP around the ambitious 5% growth target. There are limited interest rate decisions out of EM next week, and instead, a greater focus on GDP and inflation. Key inflation releases are due out of Czech Republic and South Africa. Across LATAM, the calendar is limited to Brazilian and Peruvian business activity data, followed by Colombian 1Q GDP. By the end of the week, India’s election will begin and run through June 4 as one billion eligible voters head to the polls, although Modi’s Bhartiya Janata Party is expected to seal a significant majority. A secondary focus will be on 1Q earnings season that began on Friday.
Highlights from emerging markets discussed below: Ecuador unlikely to suffer a meaningful fallout from diplomatic spat with Mexico, Pakistan reaches agreement on upsize to Saudi bank deposits; strong remittances in March, and Cote d’Ivoire secures Staff Level approval on program disbursements.
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 12, 2024 (late-morning).
Emerging Markets Weekly Highlights
Ecuador unlikely to suffer a meaningful fallout from diplomatic spat with Mexico
Event: Last Friday, Ecuador’s police stormed the Mexican embassy in Quito and arrested former Vice President Jorge Glas hours after he was given political asylum by Mexico. Glas served as Ecuador’s Vice President under former Presidents Rafael Correa and Lenin Moreno but was impeached early in the Moreno Administration in 2017 and jailed on corruption charges and other criminal activity allegations. Mexico has accused Ecuador of gross violation of diplomatic norms, initiated legal action in the Hague International Court of Justice and called for Ecuador’s expulsion from the United Nations.
Gramercy Commentary: Although the Ecuadorian police raid against the sovereign territory of Mexico’s embassy has triggered a serious diplomatic crisis between the two countries and drawn formal condemnation by the international diplomatic community, we do not expect repercussions for the country that meets the threshold for significant market relevance. Mexico has suspended free trade talks with Ecuador over the incident, but beyond that, any economic implications are likely to be limited, in our view. As a case in point, while the Organization of American States (OAS) “energetically condemned” the storming of Mexico’s embassy, it also criticized Mexico for sheltering someone convicted for large-scale corruption, signaling tacit sympathy with President Noboa’s decision to authorize the raid. From a domestic political perspective, we think Noboa’s decision to arrest Glas is well received by the average voter and could support Noboa’s already high approval ratings. The President’s domestic political standing is critical for his administration’s ability to sustain economic reform momentum amid important ongoing negotiations over a new IMF program.
Pakistan reaches agreement on upsize to Saudi bank deposits; strong remittances in March
Event: Saudi Arabia and Pakistan announced a $2bn increase in Saudi Arabia’s deposits in the State Bank of Pakistan to $5bn as well as additional investments as part of broader talks over a $21bn package, of which $5bn is front-loaded. At the same time, March remittances jumped 16% y/y to $3bn.
Gramercy Commentary: The additional deposits, investment, and remittance inflows are constructive for Pakistan’s near-term balance of payments and FX reserve trajectory. Further, they support the high likelihood that the government pays its upcoming maturity on April 15th as priced by the market. Negotiation progress over a new IMF program will be in focus in the coming weeks and could underpin an improving external liquidity and fundamental outlook.
Cote d’Ivoire secures Staff Level approval on program disbursements
Event: The IMF announced a Staff Level Agreement on the second review of the country’s EFF/ECF arrangements and first review of the RSF arrangement. Upon board approval, the country would receive $574mm.
Gramercy Commentary: The successful reviews under three separate programs is expected and constructive for the credit reflecting the ongoing commitment by authorities and the Fund. The press release indicates that the reform momentum to protect macroeconomic stability and deepen economic transformation under the National Development Plan remains underway. Further fiscal consolidation is envisaged, with the deficit set to shrink from 4% to 3% of GDP from 2024 to 2025. RSF measures including integration of climate into key aspects of public financial management, strengthened governance of climate policies, and adoption of measures to control and reduce greenhouse gas emissions are progressing.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of April 12, 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.