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Contents
Market Overview
Macro Review
All eyes are on the FOMC meeting next week. Resilient U.S. economic activity in recent weeks, still elevated inflation, a huge beat in May payrolls, hawkish comments by Fed officials and surprising hikes by the Central Banks of Australia and Canada have all contributed to keeping the possibility of another Fed hike alive. However, a higher-than-expected increase in U.S. initial jobless claims in early June and ISM Services PMI unexpectedly dropping to a five-month low of 50.3 in May could be indicative of some cooling off in the U.S. economy and encourage the Fed to take a pause in June. This provided a boost to risk assets while the USD lost ground, especially against currencies with more hawkish central banks. The hawkish surprises by the Central Banks of Canada and Australia put DM sovereign yields under pressure as curves bear-flattened, reflecting market positioning for “higher-for-longer” rates. In the FX market, the AUD was the top performer among G10 currencies reflecting the RBA surprise hike, while the EUR/USD continued to trade below 1.07 following the ECB’s Consumer Expectations Survey for April which showed a significant decline in inflation expectations. Meanwhile, the World Bank adjusted its forecast higher for global growth in 2023 to 2.1%, from 1.7% previously, but highlighted the significant expected deceleration from 3.1% recorded in 2022.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week 0.3% higher with spreads 3 bps tighter. Corporate credit was also 0.3% stronger this week with spreads 4 bps tighter. Sovereign outperformers over the week included Argentina, Egypt, and Bolivia, while Tunisia, Zambia and Ethiopia underperformed. Amid Fed pause expectations dominating week and downside inflation surprises in emerging markets, EM local debt gained strongly by 1.1% this week.
The Week Ahead
The FOMC meeting on June 14th will be in the spotlight of global market attention. Consensus expects a “hawkish hold” with the Federal Reserve leaving the door open to additional hikes. However, an upside surprise on the U.S. core inflation reading for May due on Tuesday, June 13th could recalibrate expectations again toward a hike and will likely pressure markets across the board. Amid expectations for inflation to return to target not less than two years from now, the European Central Bank is likely to deliver another 25 bps hike next week and guide toward further policy tightening. Markets will also be monitoring retail sales in China.
Highlights from emerging markets discussed below: Mehmet Simsek appointed Turkey’s new “economy tzar”; market spotlight shifts on potential steps to restore economic policy credibility; South Africa’s better 1Q GDP and current account prints provide relief to the rand.
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 9, 2023 (mid-afternoon).
Emerging Markets Weekly Highlights
Mehmet Simsek appointed Turkey’s new “economy tzar”; market spotlight shifts on potential steps to restore economic policy credibility
Event: President Erdogan appointed market favorite, Mehmet Simsek, to be the Minister of Treasury and Finance in his new cabinet, signaling a potential pivot to a more orthodox economic policy environment. Additionally, Gaye Erkan, former CEO of recently failed U.S. bank, First Republic and real estate investment firm, Greystone will take over the reins at the Central Bank of Turkey (CBT), becoming its first ever female governor.
Gramercy commentary: As stated last week, we believe that a complete U-turn to full orthodoxy by the new Erdogan Administration is unlikely ahead of important municipal elections in March 2024, despite the market-friendly shift implied by these appointments. Regardless, the return of Simsek, a former Chief Economist and Market Strategist for Merrill Lynch in London, as Turkey’s “economy tzar” has been interpreted by markets as a sign that after securing a new five-year term, President Erdogan could be ready to authorize a shift back to a more orthodox macroeconomic management in Turkey. This has underpinned a strong rally in hard currency sovereign bonds, a tentative sell-off in local debt and a more pronounced one in the currency (TRY) as investors are recalibrating expectations about the CBT’s interest rate outlook. Additionally, the authorities appear to have limited FX operations in support of the lira. It remains to be seen if the market perception about a potential return to economic orthodoxy under Mr. Simsek and Ms. Erkan is sustainable. The next key signpost will be the CBT’s first monetary policy meeting under the new leadership scheduled for June 22nd. An aggressive interest rate increase combined with compelling forward guidance would be required to begin to restore the credibility of Turkey’s economic policy environment, in our view. However, we see risks that a “gradualism” approach will be preferred that could disappoint against budding market optimism about a full policy U-turn.
South Africa’s better 1Q GDP and current account prints provide relief to the rand
Event: The economy expanded 0.4% quarter-over-quarter in 1Q23 following a 1.3% contraction in 4Q due to a lower drag from net exports and inventories relative to the prior quarter. Year-over-year, growth was 0.2%; 10 bps above expectations. Meanwhile, the current account deficit for the first quarter printed at 1% of GDP compared to expectations of -2.8% of GDP on stronger than envisaged exports and a smaller services and income deficit. The rand appreciated just over 3.5% on the week.
Gramercy commentary: The better than anticipated data helps offset the otherwise challenged near-term fundamental view at the margin and has provided local assets with some breathing room. With that being said, the near-term growth outlook remains weak due to the ongoing energy crisis as well as recent softness in global external trade data. Similarly, we expect the current account to continue to widen moderately as export performance likely ebbs into 2Q-3Q, although import weakness could provide a partial offset. Key signposts for local markets include the upcoming Fed decision, May and June CPI data, and the SARB’s next rate meeting on July 20th.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of June 9, 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]
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.