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Market Overview

Macro Review

Policymakers on both sides of the Atlantic signaled that they are in no rush to start cutting rates. U.S. economic data came in strong across the board and the January non-farm payrolls beat expectations by a large margin. Markets pushed back expectations for the first Fed cut this year and March was almost completely priced out. DM sovereign yields moved higher and the USD strengthened with the DXY index breaching into 104 territories for the first time since early December 2023. EUR/USD remained below the technically significant 1.08 level. Despite the less dovish macro sentiment, the S&P 500 hit another record high and Asian markets followed ahead of the Lunar New Year festivities. Affected by LNY seasonality, Chinese consumer price inflation for January slowed further in YoY terms and PPI remained low. However, both trends could re-accelerate after the holiday. Meanwhile, in EM politics, highly anticipated elections in Pakistan appeared to produce an uncertain outcome, defying market expectations of an easy victory for former PM Nawaz Sharif. By contrast, in El Salvador, young and outspoken President Nayib Bukele won re-election in a landslide, collecting around 90% of the vote. In Turkey, Central Bank Governor Erkan resigned and was promptly replaced by one of her Deputy Governors, a credible and market-friendly choice, which supported the ongoing rally in Turkish assets.

EM Credit Update

Amid upside pressure on DM rates this week, emerging market hard currency sovereign credit (cash bonds) returns were flat, with spreads 4 bps tighter. Corporate credit was 0.2% stronger with spreads 2 bps tighter. Sovereign outperformers over the week were Egypt, Tunisia, and Ecuador, while Senegal, Namibia, and Tajikistan underperformed. EM local debt lost 0.5% this week.

The Week Ahead

Next week, the main macro releases in DM include U.S. core inflation and retail sales as well as services inflation and wage growth in the UK, two of the main factors for the Bank of England’s (BoE) next monetary policy decision. Across EM, it will be Carnival week break in Brazil and Argentina, but there will certainly be news flow from the Milei Administration’s reform quest. GDP and CPI releases are due in Poland and CPI in the Czech Republic.

Highlights from emerging markets discussed below: No change to Turkey’s market-friendly policy trajectory under new Central Bank Governor Karahan, Pakistan holds general elections with heightened uncertainty over government formation and Nayib Bukele re-elected President of El Salvador in a landslide victory.

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 February 9, 2024 (mid-afternoon).

Emerging Markets Weekly Highlights

No change to Turkey’s market-friendly policy trajectory under new Central Bank Governor Karahan 

Event: Hafize Gaye Erkan announced her resignation as Governor of Turkey’s Central Bank (CBT) after a series of nepotism allegations against her surfaced in the media. President Erdogan promptly appointed one of Ms. Erkan’s deputies, Fatih Karahan, as her replacement.

Gramercy Commentary: Ms. Erkan was a surprising but market-friendly choice when she was tapped to lead the CBT in June 2023, becoming the first female governor. She has consistently supported Minister of Finance Mehmet Simsek’s quest toward macroeconomic normalization and presided over the increase of CBT’s main policy rate to 45% currently, from 8.5% at the time of her appointment. However, in our view, Ms. Erkan’s departure due to personal reasons will not derail Turkey’s gradual pivot back to an orthodox policy management as long as its architect, Mr. Simsek, remains at the helm of the economic team and continues to enjoy President Erdogan’s support. Moreover, we believe that the new governor, Karahan, who holds a Ph.D. in economics from UPenn and is a former economist at Amazon and the N.Y. Fed, is an excellent choice. On paper, he has better macro management credentials than Erkan and appears to be trusted by both Erdogan and Simsek. We expect coordination between monetary and fiscal policy to improve under Karahan to further tighten domestic financial conditions and control inflationary pressures, especially after the March local elections are out of the way.

Pakistan holds general elections with heightened uncertainty over government formation

Event: On February 8th, Pakistan held its long-awaited general elections where, at the time of writing, the PML-N and PPP parties secured 47 and 41 seats, respectively, out of 266. Independents, many associated with former Prime Minister Imran Khan’s PTI, have garnered 59 seats. Official results show PML-N and PPP obtaining 60% of seats counted compared to average independent polls of 47%. The remaining seats to be officially counted are 106. Moderate violence was present in the run-up to the election and during the vote.

Gramercy Commentary: The outcome thus far points to stronger independent PTI-backed performance than markets were anticipating. While this increases uncertainty over the government and coalition formation process, we still expect a PLM-N and PPP coalition that ultimately paves the way for the final disbursement under the existing IMF SBA and/or a new IMF arrangement, but possibly with a delay. The terms of a new facility and execution of the policy agenda will depend in part on the new administration’s team and who will be at the helm of the Finance Ministry. When the dust settles, there will likely still be room for a period of continuation of pragmatic policies and macroeconomic adjustment, absent evolution of the military’s support. However, risk of program deviation remains elevated as the government’s popular mandate remains weak.

Nayib Bukele re-elected President of El Salvador in a landslide victory

Event: In the elections that took place on February 4th, El Salvador’s President, Nayib Bukele, won re-election with more than 80% of the vote.

Gramercy Commentary: Bukele’s successful crackdown against organized crime has materially transformed El Salvador’s domestic security environment in recent years and elevated the young President and Bitcoin enthusiast’s political profile across Latin America and beyond. Having secured an unprecedented level of support in the Presidential vote and a large majority in the National Assembly, Bukele has as strong a mandate as they get to continue to implement his policy agenda. Thus far, his bias has been market-friendly, which propelled El Salvador’s sovereign debt among the top performers in 2023. Further outperformance will be more challenging and hinges on continuation of fiscal consolidation and securing fresh sources of external funding. Despite seemingly improving relations with the U.S. and the IMF, signing a program with the Fund is not our base case and would be a major upside surprise if it were to materialize. The status of Bitcoin as legal tender in El Salvador alongside the USD remains the main obstacle as the IMF is unlikely to be willing to lend to the government unless President Bukele reconsiders his position on Bitcoin, which also seems unlikely.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of February 9, 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.