Market Overview

Macro Review

In his testimonies in front of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday, Fed Chair Powell provided remarks that sounded hawkish relative to market expectations, signaling that the FOMC could recalibrate the pace of rate tightening and that the U.S. terminal rate may be higher than expected. In reaction to Powell’s hawkish tone mid-week, the 2-year UST yield rose above 5.0% for the first time since June 2007 and the DXY Index hit a new year-to-date high of 105.88. However, on Friday, UST yields and the USD reversed course and turned sharply lower despite February’s strong U.S. jobs report (NFPs +311K vs 225K expected) as the market interpreted a slowdown in average hourly earnings as a sign that the Fed might be pushed in the direction of maintaining a 25bps pace as opposed to upshifting to a 50bps rate hike at the March 21-22 FOMC meeting. The next critical signpost will come from the U.S. February CPI print due on March 14. Meanwhile, the ECB also demonstrated a hawkish bias, supporting the EUR and triggering market repricing of the terminal rate to 4%, which implies approximately 150bps of further tightening. In China, the National People’s Congress (NPC) produced no surprises in terms of policymaker appointments and outlined a conservative growth target that decreases the pressure on the PBoC to deliver forceful easing measures in the near-term. In EM, the news flow was dominated by the intra-coalition political drama in Turkey’s opposition alliance ahead of critically important presidential and parliamentary elections now officially scheduled by President Erdogan for May 14. After intense negotiations, Kemal Kilicdaroglu, the leader of largest opposition party (CHP) was confirmed as the joint candidate of the six party anti-Erdogan block to run in the first round of presidential elections (see details in our highlights section below).

EM Credit Update

Emerging market sovereign credit (cash bonds) ended the week 0.2% lower with spreads 9bps wider. Corporate credit was 0.1% stronger this week with spreads 5bps wider. Sovereign outperformers over the week included Tajikistan, Sri Lanka, and Ecuador, while Tunisia, Zambia and Bolivia underperformed.

The Week Ahead

Focus will be on the U.S. February CPI print that will provide the last clue for markets on the likely size of the next Fed rate hike ahead of the FOMC meeting on Mar 21-22. Any sign of lingering higher than expected inflation pressures in the U.S. economy will all but guarantee a 50bps hike and challenge the “soft landing” narrative for the U.S. economy. Elsewhere in DM, the UK Chancellor will be releasing the Spring Statement on Wednesday, expected to confirm plans for fiscal consolidation. Emerging markets will have to digest an abundance of Chinese data as well as India’s February inflation, Turkey’s January current account balance, and the Bank Indonesia’s policy rate decision.

Highlights from emerging markets discussed below: Optimism around increased chances of Turkey’s reconstituted opposition alliance winning the Presidency seem premature and President Lasso’s impeachment odds appear to decline further as opposition faces internal challenges.

Fixed Income

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 March 10, 2023 (mid-afternoon).

Emerging Markets Weekly Highlights

Optimism around increased chances of Turkey’s reconstituted opposition alliance winning the Presidency seem premature 

Event: In our previous EM Weekly, we highlighted the dramatic events within Turkey’s six party anti-Erdogan alliance when the second largest opposition party, the iYi (Good) party, left the alliance and openly attacked Kemal Kilicdaroglu, the leader of the largest opposition party, CHP, labeling him “unelectable”. The iYi party represents approximately 14-15% of the polls and their support would be crucial for de-throning Erdogan. Following 72 hours of hectic, behind closed doors negotiations to avert a political disaster for the opposition before the Presidential and Parliamentary elections on May 14, it was announced that the coalition is back together under a “new formula”. Under the “new formula”, the popular Mayors of Istanbul and Ankara (Ekrem Imamoglu and Mansur Yavas) would run as VP candidates and Kemal Kilicdaroglu would be the joint Presidential candidate of the restored opposition alliance.

Gramercy commentary: The abrupt U-turn in the iYi party and its leader Meral Aksener’s position on supporting Mr. Kilicdaroglu’s candidacy for President shifted market sentiment, especially among the local financial community in Turkey. Local mood changed abruptly from desperation to euphoria under the narrative that the political momentum will now favor an invigorated opposition block under the “new formula” with Mayors Imamoglu and Yavas as VP candidates. At this stage, we are not big believers in this thesis and deem optimism about the opposition’s chances to win both the Presidency and a majority in the National Assembly to be premature. We are of the view that the Presidential and Parliamentary elections gravitate around being a coin toss and will be decided by small details in the coming weeks. Turkish domestic politics will be extremely dynamic in the months that lead up to elections. Developments might trigger a reassessment at any point but as things stand, we believe President Erdogan has a slightly better chance of winning re-election against the now formally announced opposition candidate, Kilicdaroglu. For Mr. Kilicdaroglu to win, many pieces need to fall into place for the opposition and major mistakes need to stop.  Based on the alliance’s track record until now, this seems like a tall order, in our view. Meanwhile, President Erdogan signed a decree on Friday to bring the Presidential and Parliamentary elections forward to May 14 from the originally scheduled date of June 18. We tend to think it is unlikely that a savvy political operator, like President Erdogan, is eagerly willing to go to elections early unless he expects to be able to make up the lost approval ratings after the recent tragic earthquakes by aggressive government spending while capitalizing on the opposition coalition’s difficulties to run a harmonized campaign.

Odds of President Lasso’s impeachment appear to decline further as opposition faces internal challenges 

Event: Last week, the special committee set up by Ecuador’s National Assembly to investigate corruption allegations against President Lasso and his Administration sent a report recommending Lasso’s impeachment to the Constitutional Court. However, unity behind the initiative appears to be losing steam as the populist Correista opposition struggles to convince other parties to support allegations that Lasso has committed “crimes against the security of the state”.

Gramercy commentary: Our view has been that accusations against President Lasso are likely to face a significant obstacle in Ecuador’s Constitutional Court, which is relatively independent of political interference. We think the Court is unlikely to greenlight the impeachment motion because the National Assembly’s report does not appear to show a direct link between alleged wrong-doing and Lasso. The latest developments pointing to a lack of unified opposition support behind the main allegations only reinforce this view. They also signal that in the unlikely event that the Constitutional Court approves the impeachment proposal and returns it to the National Assembly for a plenary vote, the opposition might once again have a hard time mustering an absolute majority of 92 votes in the 137-seat chamber. As a reminder, during the previous attempt to impeach Lasso in June 2022, which occurred amid violent street protests paralyzing the country, the Assembly came short of the constitutionally required mark by 12 votes. In the midst of intense political noise after Lasso’s referendum defeat in early February, Ecuador’s sovereign bond complex has given back all the impressive gains seen since October 2022, turning the credit from best to worst performer in EM. Valuations have reverted to pricing in a high probability of sovereign debt distress, which we believe is not justified by Ecuador’s fundamental credit backdrop. As such, in the event market concerns about the worst-case scenario of Lasso’s potential impeachment start to ease as the Assembly struggles to make a compelling case, the sovereign bonds should start to recover some lost ground, in our view.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of March 10, 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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