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Market Overview

Macro Review

The Federal Reserve’s dovish FOMC tilt gave way to a strong rally. U.S. Treasury bonds advanced on softer Manufacturing PMIs, low MBA mortgage applications and a lower refunding announcement, just as the FOMC delivered a more dovish verdict. Chair Powell signaled that the stance of policy remains restrictive and further tightening would be warranted in a strong growth environment. However, evidence this week was more akin to a softer landing, especially after non-farm payrolls. Meanwhile, Eurozone inflation came in below expectations at 2.9% and the ECB’s Vujcic said the Central Bank was done with rate hikes for now. The Bank of England’s MPC was more hawkish but that was still trumped by the Bank of Japan. The tweaking of Japan’s monetary policy was portrayed as adding more flexibility, but in reality, it is a policy that is slowly being dismantled having only been appropriate in a low inflation world. Elsewhere, Chinese PMIs disappointed and showed signs of weakening in the services sector. The broader picture within EM remains mixed as Saudi Arabia’s 3Q GDP underwhelmed having declined 4.5%, Czech Republic are ever so close to a technical recession, Chile has all but given up on boosting FX reserves which allowed CLP to strengthen and Nigeria has been steadfast in devaluing the naira. Finally, Panama was downgraded by Moody’s to Baa3 as a larger fiscal deficit is expected as the government threatens to tear-up a contract with one of the country’s largest copper miners.

EM Credit Update

Emerging markets sovereign credit (cash bonds) ended the week up 2.1% with credit spreads 18bps tighter. Sovereign outperformers were Venezuela, Ethiopia and Tunisia, while Bolivia, Iraq and Panama underperformed. The JPM EM sovereign bond index review is now underway for Venezuela as U.S. sanctions were lifted. Venezuela was removed from the EM sovereign index in November 2019 and the bank will now assess the credibility of re-including Venezuelan and PDVSA debt.

The Week Ahead

Events over the following week include the Reserve Bank of Australia decision and continuation of 3Q earnings. Chair Powell is also speaking at the IMF Research Conference. Key EM interest rate decisions are due out of Mexico (11.25%), Peru (7.25%), Poland (5.75%) and Romania (7.0%). Poland is likely to remain on the cutting cycle, while the Bank of England and ECB have recently paused on account of declining inflation, even if that was triggered by a freeze in fuel prices. Brazil’s Central Bank minutes are due after the recent 50bps cut, along with an inflation print covering October. Other important inflation releases are due out of Chile, China, Colombia, Czech Republic, Hungary, Mexico, Peru, Philippines and Thailand.

Highlights from emerging markets discussed below: Panama mining contract saga pressures market assets amid large protests, Sri Lanka’s sovereign debt restructuring appears to edge closer to resolution, and Brazil’s Central Bank maintains 50bps rate cutting cadence despite global headwinds.

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 November 3, 2023 (mid-afternoon).

Emerging Markets Weekly Highlights

Panama mining contract saga pressures market assets amid large protests   

Event: Amid street protests against a contract between the government and Canadian mining company, First Quantum, for the operation of one of the world’s largest copper mines, Panama’s political and legal system appears poised to revoke the agreement.

Gramercy commentary: Following days of massive protests on environmental grounds against the mining contract, unpopular President Cortizo called for a national referendum on the issue in a move to appease protestors. However, there could be a scenario in which the contract is revoked without the need for a referendum by either an act of Congress or the judiciary. Against the backdrop of a challenging fiscal situation, the sovereign is likely to forgo up to 1% of GDP in expected budget revenue from the contract cancellation and could lose its investment-grade (IG) rating by Fitch. However, Moody’s and S&P are likely to maintain Panama’s IG status for the foreseeable future, in our view. The country is heading into presidential elections in May 2024, which means elevated political noise is likely to persist in the near-term and could crystalize compelling value in market assets depending on how the economic outlook evolves.

Sri Lanka’s sovereign debt restructuring appears to edge closer to resolution      

Event: Signals by the IMF appear to suggest that the Fund is likely to greenlight Sri Lanka’s recent agreement with the Export-Import Bank of China over restructuring around $4bn of bilateral debt, which is more than 50% of the total amount owed to China. Separately, a New York court suspended the proceedings by a single large bond holder demanding a par payment by the government.

Gramercy commentary: Both developments are credit-positive from our perspective as they appear to get the authorities closer to the finish line of the onerous debt restructuring process that started back in May 2022. Reaching an agreement with China that meets the “comparability of treatment” standard and complies with the targets/conditionalities set by Sri Lanka’s IMF program has been a key obstacle to concluding the process thus far, but now appears to be moving in the right direction. Meanwhile, the decision by the NY court to suspend the proceedings against the sovereign should give Colombo time to complete the restructuring process (presumably by 1Q 2024) without the additional complexities that could have been introduced by a holdout demanding full repayment.

Brazil’s Central Bank maintains 50bps rate cutting cadence despite global headwinds         

Event: The Central Bank of Brazil (BCB) cut its main policy SELIC rate by 50bps to 12.25%, in line with market expectations, and guided toward policy easing of the same magnitude in upcoming meetings.

Gramercy commentary: In its market communique, the COPOM (monetary policy committee) indicated that policymakers anticipate “further reductions of the same magnitude in the next meetings”, which points to another 50bps in December and clearly keeps a 50bps cut in January 2024 on the table. With easing inflation pressures (5.2% latest print for September and 4.0% median forecasted for 2024) and the highest real rates among major EMs, the BCB remains in a comfortable position despite a more challenging global environment that has forced some of its peers to slow down their respective easing cycles in the face of “higher for longer” DM rates and a strong USD. Going forward, we expect the authorities’ reaction function to remain cautious and cognizant of international developments. Further, any potential acceleration of policy easing that markets might expect in early 2024 will be carefully measured against the evolution of long-term inflation expectations domestically and the outlook for DM rates.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of November 3, 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.