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Market Overview

Macro Review

The Fed could have been more hawkish. The market can breathe a sigh of relief. There was space to follow the Kashkari line of thinking. The Fed’s Kashkari had guided that he would reduce his dot plot to just one cut in 2024 from two previously. The dots actually remain unchanged at three cuts in 2024, but there was a real risk of this reducing to two. Nine officials forecast two or fewer cuts and a tenth would have moved the median to 50bps (two cuts). The March Summary of Economic projections also saw GDP growth and core PCE inflation revised higher and unemployment revised down to 4.0%. Chair Powell’s monetary space to cut policy rates was a striking parallel to Governor Ueda’s space to hike rates. Japan exited negative interest rates for the first time in eight years and scrapped a host of unconventional policies. It was hardly a surprise, and the market absorbed the news in stride given how frequently this topic has been discussed. Elsewhere, the S&P 500 made all-time highs, as did gold above $2,200/oz, but crude oil traded down after moving above $87.50/bbl. The good news spread across emerging markets. Brazil cut its Selic rate for a sixth successive time by 50bps and shortened forward guidance. Mexico’s Banixco cut interest rates for the first time since 2021. Sri Lanka secured a Staff-Level Agreement with the IMF of $3bn, as sovereign restructuring talks are expected to begin next week. Pakistan extended talks with the IMF on its review of a $3bn stand-by arrangement (SBA). Zambia restricted an ad hoc group of bondholders as a restructuring proposal is finalized. The S&P revised Egypt’s outlook to positive and affirmed the B- rating as the credit improvement is visible. Turkey raised interest rates by 500bps to 50% and surprised market participants as it sought to stabilize the currency to trim inflation expectations. Ukraine made substantial IMF progress. Finally, China’s PBoC kept the one-year MLF rate unchanged at 2.5%, along with the one-year and five-year Loan Prime Rates at 3.45% and 3.90%, respectively. Chinese economic data also surprised to the upside, with industrial production growing 7.0%, fixed asset investment growth of 4.2% and retail sales advanced 5.5%.

EM Credit Update

Emerging market sovereign credit (cash bonds) ended the week up 1.1% with credit spreads 12bps tighter. Sovereign outperformers were Zambia, Sri Lanka and Argentina, while Kuwait, Ethiopia and Papua New Guinea underperformed.

The Week Ahead

We expect some focus on U.S. core PCE inflation data next week. Chair Powell had commented that while “recent data has not improved our confidence” inflation is sustainably moving toward the 2% target. EM investors will be equally focused on Turkish municipal elections, along with elections in Senegal and Slovakia. Key EM interest rate decisions are due from Ghana (29%), Hungary (9.0%), Nigeria (22.75%), South Africa (8.25%) and Sri Lanka (9.0%). Egypt cancelled its Central Bank meeting as it deemed that the March 6 unscheduled tightening was sufficient. We can also expect some focus on Bank of Japan minutes.

Highlights from emerging markets discussed below: Turkey’s Central Bank hikes 500bps in significant boost to investor confidence and Venezuela’s regime escalates crackdown on opposition in runup to July 28th election date.

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 22, 2024 (late-morning).

Emerging Markets Weekly Highlights

Turkey’s Central Bank hikes 500bps in significant boost to investor confidence

Event: The Central Bank of Turkey (CBT) hiked its main policy rate by 500bps to 50%, defying consensus market expectations that saw policymakers as too politically constrained to take decisive action only days ahead of important local elections on March 31st. In addition, the CBT also widened its interest rate corridor around the main policy rate to +/-300bps from +/- 150bps. This gives the authorities additional flexibility to deliver further tightening of onshore financial conditions without an explicit hike by shifting all funding to the upper bound of the policy rate corridor.

Gramercy Commentary: CBT’s policy action this week comes as a major upside surprise to consensus market expectations and domestic economic sentiment and could set in motion a powerful “virtuous cycle” for macroeconomic rebalancing and local currency assets in the second half of the year, in our view. The authorities pointed to the deterioration in the inflation outlook due to resilient domestic demand and unequivocally confirmed a strong commitment to bringing inflation under control. In that context, we expect a disinflationary path to gain traction in 2H supported by favorable base effects as well as better coordination between monetary and fiscal policy in the aftermath of the upcoming local elections. This week’s preemptive policy action might even enable the CBT to consider rate cuts in 4Q if the inflation outlook improves and medium-term inflation expectations get credibly re-anchored. This should make rebuilding FX reserves and ensuring relative TRY stability more achievable, supporting the investment case for Turkish local currency assets.

Venezuela’s regime escalates crackdown on opposition in runup to July 28th election date 

Event: The authorities arrested nine close associates of opposition leader Maria Corina Machado (MCM) on charges of plotting to destabilize the government, including Machado’s campaign manager Magalli Meda. Meda has been rumored as MCM’s potential replacement to run against President Maduro in the upcoming elections on July 28th given Machado remains formally banned by the government from participating in politics.

Gramercy Commentary: The Maduro regime continues to pile pressure on the opposition in apparent defiance to the Barbados agreements signed in October 2023 which allowed the easing of U.S. sanctions on Venezuela, including on the economically all-important oil sector. While the lifting of oil sanctions has been financially highly beneficial for Venezuela’s embattled economy and the regime, the government’s actions in recent months have repeatedly demonstrated that retaining power at any cost is clearly being prioritized over ensuring the continuation of sanctions relief beyond the April review period set by the U.S. Department of State. Looking ahead, we believe the key question from a market perspective will be whether the U.S. and Venezuela can find some sort of workable formula for diplomatic rapprochement after the July elections if they are assessed by the international community as meeting at least a minimal legitimacy threshold.

Emerging Markets Technicals

Emerging Markets Flows

Source for graphs: Bloomberg, JPMorgan, Gramercy. As of March 22, 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.