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Contents
Market Overview
Macro Review
Wagner’s mutiny and Prigozhin’s exile to Belarus was a short-lived risk event. Instead, the focus shifted to the ECB Forum in Sintra. The ECB’s Lagarde noted that barring a material change to the outlook, the ECB will continue to increase rates in July. This was a view that was supported by German provincial inflation coming in at 6.2%, relative to the prior reading of 5.7%. However, German consumer confidence has worsened for the first time in nine months, so there is a process of mixed signals. Speaking of mixed signals, Australia’s CPI reading fell to 5.6%, relative to expectations of 6.1% and triggered a rally in local bonds. Indeed, PIMCO advertised its view of a forthcoming recession which created a further influx in Australia’s bonds. The idea of a U.S. recession received pushed back from President Biden, but it was also supported by a weaker initial jobless claims release and an upbeat 1Q GDP reading (2.0%). Even the largest U.S. banks comfortably passed annual stress tests, which included an “exploratory market shock component” for the first time, with the Fed’s Vice Chair of Supervision noting that the sector remains strong and resilient. However, this does leave U.S. Treasury 2s10s at -102bps which is close to the most inverted it has been since March, having inverted by 25bps through June. Elsewhere, CNH was volatile and rose above 7.25%. Chinese PMIs and the S&P growth revision to 5.2% (from 5.5%) were largely ignored. As a tangent to emerging markets, Greece’s Kyriakos Mitsotakis scored a landslide victory in Sunday’s general election with New Democracy taking 40.5% of the votes (Tsipras’ Syriza Party slumped to 17.8%). Otherwise, the events in EM were linked to IMF progress and sovereign restructuring proposals. We can expect proposals from Sri Lanka and Zambia rather imminently, while the IMF announced a stand-by agreement with Pakistan for $3 billion, which led to a significant rally in Pakistani assets.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week flat with spreads -6bps tighter. Sovereign outperformers were Pakistan, Sri Lanka and Argentina, while Tunisia, Ecuador and Ethiopia underperformed. Argentina clocked its second-best monthly return on record (25%), with the best monthly return in May 2020 (29%). EM sovereign performance year-to-date ranks as follows: El Salvador (+59%), Sri Lanka (+44%), Zambia (+26%), Tajikistan (+21%) and then Argentina (+20%).
The Week Ahead
Non-farm payrolls, FOMC minutes and the Reserve Bank of Australia will likely determine the G10 state of play next week. Key EM interest rate decisions are limited to Malaysia (3.0%), Poland (6.75%) and Romania (7.0%). However, the Brazilian Senate will hold a confirmation hearing for Central Bank Board nominees Gabriel Galipolo and Ailton Aquino on July 4th. Inflation updates are due out of Indonesia, Peru, South Korea, Thailand and Turkey. Indonesia’s inflation ought to reveal another reading within its target band, just as Brazil will likely publish negative readings. It is also possible that central bank minutes from Chile, Colombia and Mexico will offer a glimpse into when rate cuts may come.
Highlights from emerging markets discussed below: Argentina’s ruling coalition selects Massa as unity candidate; Zambia reaches deal with official creditors; and Pakistan reaches agreement with IMF on new 9-month $3 billion Stand-By Arrangement.
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 June 30, 2023 (mid-afternoon).
Emerging Markets Weekly Highlights
Argentina’s ruling coalition selects Massa as unity candidate
Event: The recently renamed ruling coalition, Unión por la Patria (UxP), selected current Economy Minister, Sergio Massa, as its unity candidate following previously announced and since retracted bids from long-time politician, Daniel Scioli, and current Interior Minister, Eduardo de Pedro. Argentine assets extended their rally on the news albeit remain below peaks touched earlier this year. Meanwhile, discussions over the next IMF program disbursement continue.
Gramercy commentary: We agree with the market’s constructive reaction to Massa’s candidacy as it materially lifts the political risk floor as it relates to Peronism. We expect Massa will be able to ink a deal with the IMF which allays short-term concerns over arrears and reduces the risk of disorderly shock between now and the primary vote, also known as the PASO, on August 13th. With that being said, the fluidity of the political backdrop leaves uncertainty elevated for the PASO vote where the key focus will be performance of outsider candidate Javier Milei as well as the winner of the opposition ticket. Despite the possibility for renewed interim volatility, we continue to expect constructive policy change in the aftermath of the election which bodes well for economic conditions and asset prices over the medium-term.
Zambia reaches deal with official creditors
Event: The government has agreed with its official creditors to restructure over $6 billion of its external debt with terms including an initial grace period of three years and a repayment schedule over 20 years with an average coupon of 1.5% and step-up to 2.5%. Estimated savings on debt service is $5.8 billion. The agreement also incorporates contingencies that could allow for accelerated and higher payments if debt carrying capacity improves to medium as defined by the IMF. The next steps entail a Memorandum of Understanding (MOU) and IMF board level approval of the first review under the country’s ECF program which will result in a disbursement of $188 million.
Gramercy commentary: The long-awaited deal is a constructive step in the overall debt resolution process for Zambia as well as for the common framework which has remained largely under gridlock. Following the MOU and IMF disbursement, private creditor restructuring remains the next key signpost with most now anticipating a deal by year-end or sooner. Eurobonds have traded up on the news, pricing in much of the upside albeit with room for some moderate gains on potential PDI or evolution of exit yield dynamics. Thereafter, Hichilema’s remaining political capital will be key in deploying policies which further extend a virtuous cycle with respect to investment and FX dynamics.
Pakistan reaches agreement with IMF on new 9-month $3 billion Stand-By Arrangement
Event: In a relatively swift turn of events, the government and IMF were able to reach a staff level agreement on a new 9-month $3 billion Stand-By Arrangement facility as an alternative to completing its stalled EFF program which expired today. The deal followed Pakistan’s amended budget in response to the Fund’s initial criticism and a 100bps rate hike. Board level approval is expected in mid-July. Bonds traded up over 10pts since mid- last week.
Gramercy commentary: The short-term agreement materially improves the government’s ability to navigate until elections later this year, barring any unforeseen shocks, as the ultimate electoral outcome will be key to unlocking medium-term financing solutions. The pace and nature of the events in the run-up to the deal, following several months of delays, suggests that both sides recognized the fragilities of the external position and need for an agreement as a bridge to the election. While the domestic political situation remains fluid leaving policy and assets subject to volatility in the interim, our base case continues to envisage a constructive medium-term financing solution.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of June 30, 2023.
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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