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Market Overview

Macro Review

Markets grappled with strong U.S. data and reassessed risks around Trump 2.0. In short order, there was underlying strength. The stronger-than-expected GDP growth of 3.3% was met with declining Core PCE, which is the Fed’s preferred inflation metric. Global PMIs were notably strong, where U.S. services and manufacturing rose to seven-month and fifteenth-month highs, respectively. The Bank of Canada, European Central Bank, along with the Turkish and South African Central Banks, all delivered interest rate verdicts that were in line with expectations, but the Bank of Japan lightly signaled an end to NIRP may soon arrive. The path to the U.S. election was also tempered as NAFTA has already turned into USMCA, and reducing supplier dependence on China is already well advanced. On the topic of China, the PBoC have guided a RRR cut (see below), along with providing developers with working capital relief and even an MLF cut is now anticipated. Ecuador made headway in fiscal rectification with its VAT increase; Argentina’s Congress is set to debate the omnibus law a week later than expected; and Chile passed a number of tax evasion reforms. Meanwhile, Egypt’s fiscal position is appearing ever more precarious, which is further constrained by lower volumes through the Suez Canal; Turkey’s Central Bank Governor allegations came and went; and Ghana won over IMF support for its first $600m disbursement under its three-year extended credit facility.

EM Credit Update

Emerging markets sovereign credit (cash bonds) ended the week down 0.1% with credit spreads 4bps wider. U.S. Treasury yields marginally fell, primary market issuance was light, and the focus was on global PMIs, U.S. inflation and Chinese stimulus measures, which netted out the week in a balanced way. Sovereign outperformers were Pakistan, Ecuador and Argentina, while Tunisia, Ghana and Ethiopia underperformed.

The Week Ahead

The Federal Reserve and Banks of England will likely keep interest rates unchanged next week. The week will end with U.S. non-farm payrolls. Of equal importance for U.S. Treasuries is the degree of issuance with the upcoming Quarterly Refunding Announcement. Across EM, the key rate decisions are due from Egypt (19.25%), Ghana (30%), Hungary (10.75%) and Singapore (4.0%), which is the first decision under new leadership. China’s PMI readings will act as a test after the global rebound that was witnessed in DM over the past week. Finally, GDP from Hong Kong, Philippines and Taiwan, followed by inflation releases out of Indonesia and South Korea are expected.

Highlights from emerging markets discussed below: China policy easing deepens with larger than expected RRR cut and Turkey’s Central Bank delivers 250bps hike to 45%, signals pause in the record-setting tightening cycle.

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 January 26, 2024 (mid-afternoon).

Emerging Markets Weekly Highlights

China policy easing deepens with larger than expected RRR cut

Event: The PBoC announced a 50bps reduction in the RRR effective February 5th which should result in roughly RMB1trn of additional liquidity in the banking system. Additionally, the Central Bank lowered the relending and rediscount rates for rural and SME sectors by 25bps effective January 25th. Lastly, Governor Pan established a new Credit Market Department to channel funds to targeted parts of the economy including technology finance, green finance, inclusive finance, pension finance, and digital finance. Lastly, a mechanism to support the stock market is reportedly under consideration whereby SOEs would be required to move offshore funds into domestic stocks.

Gramercy Commentary: The largest RRR cut in two years combined with a signal of additional targeted lending reflects the authorities’ desire to more materially shore-up growth while preserving financial stability and avoiding broad-based stimulus. We expect the measures thus far to have a moderate impact on activity and confidence and remain in line with a growth rate of 4.5-5% for this year. While not yet a base case, continued market pressure or economic weakness could begin to push authorities more meaningfully towards a holistic solution to the ongoing property crisis, which in turn would more substantially restore confidence.

Turkey’s Central Bank delivers 250bps hike to 45%, signals pause in the record-setting tightening cycle

Event: In line with Gramercy’s expectations and market consensus, the Central Bank of Turkey (CBT) delivered a well telegraphed 250bps hike, bringing its main policy rate to 45%. The CBT said that it considers its policy stance to be “sufficiently tight” now following a record-breaking cycle that crystalized 3650bps of policy tightening since June 2023, but signaled it will remain responsive to changes in the inflation outlook as normalizing the macro environment remains the authorities’ top priority.

Gramercy Commentary: Turkey’s new economic team under the leadership of Minister of Finance Simsek and CBT Governor Erkan continue to deliver on a market-friendly pivot back to orthodox macroeconomic policy management that also appears to enjoy the full backing of President Erdogan. In that context, we think that markets will increasingly be warming up to the idea that Turkish assets, and especially local currency sovereign debt, could be one of the standout stories in EM this year, supported by a return to economic orthodoxy and a number of favorable technical factors. In terms of the next fundamental catalysts, our focus is on the upcoming local elections on March 31st in which we expect candidates supported by President Erdogan to do well, further validating the macro normalization program championed by Mr. Simsek and Ms. Erkan. Furthermore, we expect significantly tighter onshore financial conditions to contribute to a meaningful disinflation trend around mid-year. This should crystallize high ex-post real interest rates, support both the FX and CBT reserves, and lead to further improvement in overall investor sentiment, among other credit-positive developments.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of January 26, 2024

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.