Contents
Market Overview
Macro Review
Donald Trump’s triumphant return to the White House, with potentially full control of the U.S. Government given the strong Republican majority in the Senate and Republican control of the House likely, bodes seismic changes in every political, economic and geopolitical aspect that matters for markets. The initial reaction has been one of relief that a contested election did not materialize, supporting risk assets across the board and invigorating the so called “Trump trades”. Bitcoin rallied to the highest level ever, U.S. stock indices were on fire (~+5%), and the DXY touched 105 for the first time since July. For next steps, markets will be awaiting the first post-election signals on economic and foreign policy direction by the incoming Trump Administration as well as key cabinet appointments. Meanwhile, in this eventful week, the FOMC lowered the Fed Funds target rate by 25bps to 4.75/4.50%, in line with market expectations. In his press conference after the decision, Chaiman Powell sounded upbeat about the state of the U.S. economy but indicated a strong desire to maintain optionality in the face of the now significantly increased uncertainty around the medium-term economic outlook and the path of economic policy. The market still sees around 70% probability of another rate cut in December, however expectations about the UST yield path could change materially depending on policy announcements by the Trump transition team. In China, the authorities announced a 10 trillion yuan ($1.4bn) program to help indebted local governments refinance “hidden” obligations, but stopped short of providing additional fiscal stimulus, likely opting to preserve firepower in the event of a potential “trade war” with the incoming Trump Administration.
EM Credit Update
Amid a post-U.S. elections relief rally, emerging market sovereign credit (cash bonds) gained 0.6% with spreads 4bps tighter at the index level. Sovereign outperformers were El Salvador, Argentina, and Gabon, while Bolivia, Tajikistan, and Hungary underperformed. Corporate credit was 0.1% higher with spreads 4bps wider. EM local debt outperformed, adding 1.1%.
The Week Ahead
Next week could bring headlines from the Trump transition team that break the market lull before the likely forthcoming policy storm. In the world of economics, in DM next week brings U.S. CPI for October and 3Q GDP in the UK. In EM, focus will be on the expected announcement of the budget expenditure cutting measures by the Lula Administration in Brazil and Mexico’s 2025 budget submission. Inflation prints for October are due in India and across CEE.
Highlights from emerging markets discussed below: U.S. Election Results, China PMI and Export October data improves; NPC Standing Committee meeting in focus, and Brazil’s Central Bank accelerates the pace of rate hikes.
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 November 8, 2024 (early-morning).
Emerging Markets Weekly Highlights
U.S. Election Results
As we mentioned last week, emerging markets were bracing themselves for four possible post-U.S. election scenarios. In addition, whatever the ultimate scenario, consensus seemed to point to a multi-day wait for a clear picture of who the winner may be. The opposite was the case, with Donald Trump clearly re-elected as President overnight and a Republican clean sweep looking likely.
The initial reaction of financial markets was as expected. On November 6th, the 10-year U.S. Treasury yield jumped by 20bp to an intra-day high of around 4.47%, pulling the U.S. dollar DXY index with it and initially dragging EM FX lower across the board, the one exception perhaps being the Turkish lira. EM sovereign bonds, on the other hand, faced spread tightening, with the higher yielding names out of sub-Saharan Africa and Latam outperforming peers. Judging by market discussions, the relative calm in EM credit was probably due to real money investors preferring to hold on to positions, while hedge fund investors were probably not keen on taking excessive short positions.
What’s more, by close of business on November 6th and then again by end-of-day on November 7th, FX markets had generally calmed down, helped by a turnaround in U.S. Treasury yields, with the more volatile EM FX stories like MXN and BRL ending stronger than their election-day close. With Donald Trump winning the elections, equities led the way versus other asset classes on a WoW basis in USD terms by close of business on November 7th (chart below). Note the second place that EM equities took, also buoyed by the recovery of many EM FX.
Looking ahead, all eyes will now be on Donald Trump’s appointments to the new U.S. Administration and their implications for U.S. policy in the coming four years. EM assets remain focused on any inflationary implications of likely U.S. tariffs on the world, greater fiscal spending and planned tax cuts, especially if the latter lead to increased corporate and consumer spending. Indeed, as we pointed out last week, scenario A (a Republican clean sweep) will continue to represent the biggest challenge for EM FX and local currency bonds. Meanwhile, positioning seems unlikely to change much in the EM sovereign credit space as EM investors wait for more clarity on U.S. policy issues and focus again on data releases and Fed action.
Source: Bloomberg, JPMorgan.
China PMI and Export October data improves; NPC Standing Committee meeting in focus
Event: October Caixin Composite PMI moved up by 1.6 points led by services strength while the NBS Composite inched up by 0.4 points with manufacturing moving back into expansionary territory at 50.2. Exports were up 12.7% y/y in October led by low-end consumer goods and broad-based demand origins while imports were down 2.3% y/y. The NPC Standing Committee press conference unveiled the specific details of new financing for local government debt resolution in aggregate of 10 trillion yuan over 2024-28. This entails 6 trillion yuan in additional special debt-swap bonds over 2024-26 and roughly 4 trillion yuan of the new special bond quota over 2024-2028.
Gramercy Commentary: The improved high frequency prints alleviated recent growth fears as the long-awaited NPC Standing Committee meeting commenced. Speculation over the size of a new local government swap initiative grew while expectations for a budget revision waned as investors awaited the NPC press conference. The new financing to alleviate local government strain is positive albeit still falls short of an outsized package which materially alters domestic confidence. We expect the focus to now shift to 2025 with authorities likely to reserve stimulus firepower for tariff uncertainty under a new Trump Administration.
Brazil’s Central Bank accelerates the pace of rate hikes
Event: The Central Bank of Brazil (BCB) increased its main policy rate (SELIC) by 50bps to 11.25%, accelerating the pace of its monetary policy tightening cycle that started with a 25bps rate hike in September.
Gramercy Commentary: BCB’s decision comes in the context of robust economic activity and medium-term inflation expectations remaining above the Central Bank’s target range. In their statement accompanying the rate decision, the policymakers strongly emphasized that re-anchoring inflation expectations in Brazil’s economy requires a “credible fiscal policy commitment” to structural measures that would reduce market concerns about the trajectory of Government finances. We note that the Lula Administration is in the midst of internal discussions on expenditure cutting measures that we expect to be publicized by the authorities in the coming days. The scope and scale of the proposed fiscal consolidation measures are likely to be the main driving factors of market risk sentiment on sovereign assets for the rest of the year and into 2025, amid elevated uncertainty around the global macro top-down environment and lingering market concerns about the Lula Administration’s commitment to fiscal discipline.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of November 8, 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]
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