Contents
Market Overview
Macro Review
In a week sandwiched between the IMF annual meetings in Washington DC last week and the U.S. elections next week, a “wait-and-see” approach dominated markets faced by the uncertainty of two potentially materially different paths for U.S. policymaking, with huge domestic and global implications. Amid lack of conviction on the future path of U.S. Treasury yields, the October non-farm payrolls came in at +12K vs +223K in the prior month, undershooting the 100K consensus number by a large margin. The underperformance was driven mostly by labor market disruptions due to hurricanes Helene and Milton as well as strikes at Boeing and U.S. ports. However, some additional weaknesses in the underlying data will most likely keep the FOMC on track to deliver a 25bps cut to the Fed Funds rate on November 7, regardless of the outcome of the U.S. elections. Meanwhile, the UK budget signaled a big increase in fiscal spending, boosting sentiment around GDP growth prospects and UK equities. However, the overall fiscal picture seems less supportive for gilts that are likely to continue to experience some steepening pressure. In China, the manufacturing PMI outperformed expectations with an uptick to 50.1 in October from 49.8 in September, which marked the first expansion (50+) since April and a six-month high, possibly boosted by the various stimulus measures announced by the authorities over the last month. Elsewhere in EM, Israel’s restrained attack on Iran last weekend could be opening the door for de-escalation, but an escalatory scenario is also still firmly on the table depending on the adversaries’ next moves. Comments by Ukrainian President Zelenskiy’s Chief of Staff suggested that flexibility in Kyiv on peace blueprints might be increasing, while South Africa’s medium-term budget was slightly weaker than expected. You can read our comments on these developments in the EM highlights section below.
EM Credit Update
Amid pre-U.S. elections uncertainty, emerging market sovereign credit (cash bonds) lost 0.2% with spreads flat at the index level. Sovereign outperformers were Jordan, Kenya and Ecuador, while Georgia, Senegal, and Panama underperformed. Corporate credit was 0.1% weaker with spreads 2bps tighter. EM local debt underperformed, losing 0.6%.
The Week Ahead
Next week could be decisive in terms of public market assets performance not only for the rest of the year, but for 2025 as well. All eyes will be on U.S. Presidential and Congressional elections, with EM investors fully focused on what path U.S. Treasury yields, the U.S. dollar and U.S. equities may continue to follow depending on the outcome. Meanwhile, on the other side of the globe, China’s National People’s Congress (NPC) Standing Committee meeting will take place, and markets will be anticipating potential announcements on more detailed fiscal measures to support the economy.
Highlights from emerging markets discussed below: U.S. Elections: scenarios and impact on EM; Israel’s restrained attack on Iran could open the door for de-escalation; Comments by Zelenskiy’s aide suggest flexibility on peace blueprints might be increasing; and South Africa’s medium-term budget slightly weaker.
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 November 1, 2024 (early-morning).
Emerging Markets Weekly Highlights
U.S. Elections: scenarios and impact on EM
With U.S. election day approaching, emerging markets investors are fully focused on what path U.S. Treasury yields, the U.S. dollar and indeed U.S. equities may continue to follow. Figure 1 highlights what we believe are the four possible scenarios for the U.S. elections (irrespective of what can happen until one of the scenarios materializes) and what implications each of the four scenarios may have for EM assets. A Republican clean sweep would probably be the most challenging for EM local and hard currency assets, given the possible inflationary and thus Fed policy implications from any bigger fiscal outlays, income tax cuts and tariffs imposed on other countries.
In anticipation of a possible Trump win, most EM FX have been depreciating across the board in October, catching up with the year-to-date underperformers in Latam, namely MXN, BRL and COP. Looking ahead into the multi-week election period, Figure 2 highlights the numerous datelines to focus on, in case the November 5th Presidential Election outcome is contested in any state. The sheer uncertainties involved mean volatility and also timing are two of the most salient factors for EM investors to focus on, especially in the period between November 9th (by when any automatic recounts should be completed) and the December 11th “Safe-Harbor” date (by when the states should have submitted their electoral college slates).
Fortunately, the experience of past elections tells us that although EM assets face heightened volatility during uncertain U.S. election processes, they ultimately exit the election period relatively unscathed. Which brings us back to focusing on the various U.S. data releases and Fed meetings that are happening at the same time as the U.S. elections process (Figure 2).
Figure 1: Four possible destination scenarios and possible EM reaction
Figure 2: The Presidential election and U.S. macro timelines
Source: Gramercy. The information presented reflects our opinions and 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.
Israel’s restrained attack on Iran could open the door for de-escalation
Event: On October 26th, Israel carried out its eagerly anticipated by markets retaliatory strikes against Iran, hitting military targets across the country, but avoiding Iran’s oil export capabilities or nuclear facilities.
Gramercy Commentary: Global markets breathed a collective sigh of relief after Israel’s air assault on Iran transpired to be limited and restrained, avoiding an immediate escalation and the associated heightened risk to global oil supply and prices. Furthermore, a restrained Israeli military action against the Islamic Republic has been a key diplomatic objective of the Biden Administration, so an optimistic read of last weekend’s events points to a potential opening for diplomacy and de-escalation in the region. It is important to note that as things stand, Iran seems to have limited deterrence options regarding Israel who appears to have successfully taken down the remainder of Iran’s most advanced air defense systems. As such, a vulnerable Iran could decide not to respond, thus breaking the retaliatory cycle, or opt for a highly symbolic retaliation. However, we caution that a less benign scenario could involve the Israeli leadership making the calculation that the current balance of power in the region favors a more aggressive approach towards Iran. We think that such a scenario carries a higher probability after the U.S. elections are out of the way, especially in case of an incoming Trump presidency and a Biden lame duck period. Such a scenario could drive a cycle of escalation and potentially impact other regional players, with associated significant risks for global oil markets.
Comments by Zelenskiy’s aide suggest flexibility on peace blueprints might be increasing
Event: According to a statement published on the President’s website by President Zelenskiy’s Chief of Staff Andriy Yermak, Ukraine’s leader could be “ready to listen” to alternative proposals on a pathway toward achieving peace, such as ideas put forward in the past by China, Brazil and South Africa.
Gramercy Commentary: As we’ve argued in previous commentary, Ukraine and Russia’s military and political objectives appear to remain at a stark contrast to one another, likely precluding credible diplomatic efforts on conflict resolution in the near-term. Just two weeks ago, President Zelenskiy’s public presentation of his “victory plan” seemed to indicate that Ukraine’s pre-conditions for peace talks with Russia retained “maximum objectives” characteristics that we deem unlikely to bring the two sides closer to the negotiation table. However, Mr. Yermak’s latest comments might be suggesting increasing flexibility in Ukraine’s position, potentially to build broader global support ahead of what will likely be a difficult winter as well as a challenging geopolitical context heading into 2025. We’ll keep monitoring closely for additional signals on potential moderation in Ukraine’s position on war objectives/conditions for peace and more active involvement by the so called “global South” but remain pessimistic that a credible pathway toward ceasefire negotiations may emerge in the near future.
South Africa’s medium-term budget slightly weaker
Event: Finance Minister Enoch Godongwana presented the annual Medium Term Budget Policy Statement (MTBPS) this week with a slightly wider FY 24/25 main budget deficit of 4.7% of GDP relative to the February budget of 4.3% of GDP on combination of recent revenue underperformance and higher spending. While this implies slight widening relative to the previous fiscal year, the primary balance is set to remain in surplus and debt is expected to stabilize at 75.5% of GDP in FY 25/26. Real GDP growth for next year is estimated at 1.7% and inflation at 4.4% in line with consensus estimates.
Gramercy Commentary: As the first fiscal update under the GNU, the MTBPS was received neutrally by the market despite the moderate underperformance. Godongwana’s presentation struck a pragmatic tone which emphasized public-private partnerships for infrastructure investment while issuance expectations remained broadly stable. The fiscal anchor continues to be a primary surplus over the next three years while further technical work is completed on a formal permanent measure to anchor policy. Investors will look to the 2025 budget in February for the next update on the fiscal path and to the broader discussion document on a permanent fiscal anchor set to be released in March, which could contain a proposal for legislative changes.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of November 1, 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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