This week was dominated by the FOMC, GDP releases and PMIs out of Europe and China. The weak USD narrative continues to circulate and gather momentum, driven by JPY after BoJ minutes were released earlier in the week. Japan’s GDP release on Sunday evening will now be another watchful event. Meanwhile, fixed income markets outperformed with U.S. Treasuries rallying. The 2-year and 5-year reached new tights with the U.S. Treasuries Volatility Index clocking record lows as 10-year real yields continue to move deeper into negative territory (-99 bps) as inflation breakevens widened. This was the principal driver behind gold’s nascent above $1900/oz, with silver similarly outperforming, albeit for slightly different reasons. The FOMC was of course the main feature but little was gleaned: a policy review is expected in September, although there were few developments regarding forward guidance, YCC or ZIRP. Instead, this puts some emphasis on Fed minutes come August 19. Data out of the Fed on Thursday puts the balance sheet back above $7 trillion, yet the take-up of individual facilities is slowing, particularly within the SMCCF as the Commercial Paper Facility appears to be in run-off, even as these facilities are extended. We ended July with the EMBI up 3.1% (28 bps tighter) with CEMBI up 2.0% (21 bps tighter). Key contributors included Suriname, Dominican Republic and Sri Lanka, while Lebanon, Turkey and Senegal all underperformed. The main events next week include Turkey’s July inflation print after the FX volatility this week, Central and Eastern European PMIs as COVID-19 cases surge, and rate decisions out of Brazil, India and Thailand. Indeed, this will be Thailand’s penultimate decision under its current governor who is stepping down in September, with a new candidate selected this week. This all comes amid a slew of inflation and GDP releases, along with corporate earnings.
Event: The Supreme Electoral Tribunal decided to postpone the upcoming presidential elections to October 18, from September 6. The original election date was in May. If no candidate can garner over 50% of the votes, a runoff is scheduled to be held on November 29.
Relevance: Bolivia has been caught in a state of political limbo since its Former President, Evo Morales, resigned in November of 2019 after accusations of electoral fraud. Although Jeanine Anez, the conservative Senate VP, took over as interim President, she lacks the broad-based credibility that comes with a popular mandate. Yet, a couple of months after delaying the original election date in May, Bolivia is now facing a rapid increase in new COVID-19 cases amid Latin America becoming the pandemic’s global hotspot. Confirmed cases are approaching 75K, with around 40K new cases recorded in July alone. Anez and many members of her cabinet have also tested positive in recent weeks. This latest decision to postpone was made with the justification of voter health and safety, but has quickly become politicized. MAS, the leftist party previously led by Morales, has challenged the delay as a cover for Anez, who is currently behind in the polls. Thousands marched in protest following the decision in a show of opposition against the current government, revealing the deep political fragmentation that Bolivia still faces. As many countries in Latin America continue to battle rising coronavirus cases amid global concerns of a second wave, Gramercy expects to see increasing challenges to political stability and policy credibility across the region and beyond. Mismanagement of the crisis and/or politicians trying to leverage it for electoral gains can erode public trust and exacerbate existing divides, raising the risk of social unrest that could further prolong the public health emergency and delay economic recovery.
Event: The Ministry of Finance presented the mid-year budget to Parliament. Growth is now expected to decelerate to 0.9% YoY from 6.8% and the deficit is projected to widen to 11.4% of GDP from 4.7%. The authorities do not expect the budget deficit to go back below their 5% of GDP cap until 2024.
Relevance: Although hardly surprising given the extraordinary situation related to COVID-19, Ghana’s mid-year budget highlighted the substantial damage that the pandemic has inflicted on the economy and government finances. The main concerns are on the fiscal side, where a shortfall of petroleum and tax receipts is projected to widen the revenue gap to GHS (cedi) 14 billion. At the same time, spending will increase by GHS 13 billion to combat the pandemic. This budget unwinds much of Ghana’s progress on fiscal consolidation in recent years under an IMF program that concluded in 2019. The deficit is now substantially above the 5% cap that had been established in the 2018 Fiscal Responsibility Act and also violates stipulations of a balanced primary budget. As a result, government debt/GDP is expected to rise to around 70%, from 64% in 2019. Moreover, the authorities do not anticipate the budget deficit to be under 5% until 2024, signaling a challenging medium-term fiscal path. While markets have been relatively forgiving of expansionary government policies across EM in 2020 due to the pandemic, it is unclear for how long such benign sentiment will last. Ghana is among the EM sovereigns that are particularly exposed to swings in global risk appetite due to high reliance on external financing in both local and foreign currency, in the context of very weak debt affordability (government interest cost burden is projected to surpass 40% of revenues in 2020, from an already elevated 37% in 2019).
Event: Hong Kong experienced a sharp spike in COVID-19 cases in recent weeks after almost two months of lapsing case growth, pressuring hospitals, and dampening the territory’s economic recovery. The government has reintroduced new coronavirus restrictions starting Wednesday, including a ban on gatherings of more than two people and a ban on indoor dining in restaurants.
Relevance: In our view, Hong Kong exemplifies the risk that a material second wave of the pandemic poses to already weakened economies across EM. Despite its proximity to Wuhan, Hong Kong was highly successful in containing the virus early on, with under 3,200 confirmed cases and only 24 deaths in a city of 7.51 million people. On the other side, the government’s very strict approach to fighting the virus resulted in an economic contraction of 9% YoY in 2Q. The authorities had recently started to relax some containment measures; however, the growing number of new cases has now forced them to dial back reopening. Given the measures are stricter than those implemented during the first wave and the number of infections is higher, we think they have the potential to weigh more heavily on consumption and to remain in place for longer. This will likely postpone consumption recovery and put additional pressure on employment and incomes in a city already plagued by a year of anti-government protests and the U.S.-China trade war. From our perspective, the latest COVID-19 dynamics in Hong Kong (and in other jurisdictions where new cases have are resurging such as Spain) underscore the risk of a potential significant second wave of the pandemic with all the associated economic, social, and political implications, which do not seem to be priced in by risk assets.
Like many around the world, we have been inundated with earnings disclosures, both good and not-so-good, in recent weeks. Here are four broad takeaways based on what has been published so far:
Below, we briefly highlight four news stories in the corporate world which have piqued our interest.
Please contact our Co-Heads of Sovereign Research with any questions:
Kathryn Exum, Senior Vice President, Sovereign Research Analyst
Petar Atanasov, Senior Vice President, Sovereign Research Analyst
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