Contents
Market Overview
Macro Update
This was another busy week of tariff-related news. It started with the U.S. imposing a 10% tariff on China and 25% tariffs on Canada and Mexico. The Canada and Mexico tariffs were delayed until March 1st after quick negotiations, in which Mexico agreed to send 10,000 national guard officers to the border to help control the trafficking of fentanyl and to prevent immigration, and Canada agreed to substantially increase the patrolling of its border with the U.S.
Financial markets recovered from the initial shock, with U.S. equities up +0.9% on the week, after being down almost -3% on Monday. The DXY ended the week -0.6% lower at 107.7, from an initial jump to almost 110 on Monday.
In the fixed income markets, the 10-year U.S. government bond yield is ending the week down only 4bps, despite falling 10bps mid-week. It recovered after the U.S. Treasury kept the size of its upcoming debt sales unchanged and alleviated concerns about additional supply of longer-term bonds under new Treasury Secretary Scott Bessent.
Combined with a weaker ISM services PMI (falling 1.2pts in January to 52.8) and JOLTS report showing lower than expected job openings, the 2s10s U.S. Treasury curve flattened 11bps as a result. On Friday, U.S. Treasury yields gave up some of these gains, despite lower-than-expected non-farm payroll data showing 143,000 jobs, due to the upward revision in the November and December NFP data. This was a slightly lower-than-expected unemployment rate of 4%, and higher-than-expected YoY average hourly earnings.
In geopolitics, hopes for a resolution to the Ukraine conflict rose on rumors that the Trump Administration would unveil plans for a summit between U.S. President Trump and Russian President Vladimir Putin, taking place in February or March. Meanwhile, President Trump’s remarks of a possible U.S. takeover of the Gaza strip were met with rebukes from U.S. allies, including Saudi Arabia, Egypt and Jordan.
In terms of global economic data, global manufacturing PMI releases were mixed, with Asia showing India still steaming ahead of China, and Vietnam starting to show some stress due to its high export/GDP ratio and likely challenges from U.S. tariffs on China.
Eurozone CPI came in slightly higher than expected at 2.5% YoY (its highest level since August 2024), with lower base effects from the first quarter of 2024 taking their toll on a number of countries.
In the UK, the BoE cut rates by 25bps in line with market consensus. While two out of the nine committee members sent a more dovish signal in voting for a 50 bps cut, this was offset by more hawkish post-meeting communication.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week up +0.7%, with credit spreads only 1bp tighter. Emerging market corporate credit also ended the week up +0.4%, with credit spreads unchanged. For sovereigns, while investment grade and high yield bonds performed in line on a total return basis, spread performance was bifurcated. Investment grade spreads were wider by 3bps, while high yield spreads tightened 4bps. For corporates, investment grade outperformed high yield by 15bps on a total return basis on the back of the move in U.S. Treasuries but underperformed by 2bps on a spread basis (+2bps on the week).
EM local currency bonds continued to be resilient this week, up +0.6% despite tariff-induced volatility.
Venezuela was the outperformer this week as market participants were encouraged by the visit of U.S. Special Envoy Grenell to Venezuela and his meeting with Venezuelan President Maduro. Lebanon, Ukraine and Ecuador were also top performers on the back of positive political and geopolitical developments. In Ecuador, the market will be watching this Sunday’s Presidential election to see if incumbent President Noboa is able to win in the first round. Argentina’s USD bonds were the underperformer of the week on the back of profit-taking, following a good 12 months of solid outperformance versus peers.
On the new issue front, it was another busy week for EM corporates with 14 deals pricing across three regions. Sovereign issuance picked up as well with five deals (Croatia, Romania, Poland, Turkey and Uruguay).
The Week Ahead
Next week sees the release of U.S. CPI on Wednesday, with consensus looking for a 2.9% YoY CPI reading, unchanged from December. PPI will be released Thursday.
U.S. January retail sales and industrial production as well as Fed Chairman Jerome Powell’s testimony before Congress Tuesday and Wednesday will also be in focus.
Industrial production and 4Q24 GDP will be released in the Eurozone and the UK with neither release expected to deliver any meaningful upside surprise.
Otherwise, look for CPI releases out of Hungary, India and Poland as well as Japan’s 4Q24 GDP release and UK retail sales. Central banks in the Philippines, Peru, Uruguay and Romania all have rate-setting meetings next week.
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 February 7, 2025 (mid-day).
Country Highlights
U.S. Imposes 10% Tariff on Imports from China; Mexico and Canada Given Reprieve
Event: On February 1st, President Trump declared a national emergency to address the “extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl,” and under the Emergency Economic Powers Act (IEEPA) announced 10% tariffs on China that went into effect February 4th. He also called for 25% tariffs on imports from Mexico and 10% on energy imports and 25% on other goods from Canada, which he delayed by 30 days following calls with Mexican and Canadian leaders. The China tariffs, however, went into effect on February 4th. China’s authorities responded with 10-15% tariffs on select U.S. imports, export controls on rare minerals, added U.S. firms to the Unreliable Entity list, launched an anti-trust probe into Google, and filed a complaint with the World Trade Organization (WTO).
Gramercy Comment: We expect the U.S. tariffs on China to the U.S. to pose a headwind to China’s growth this year, although this will be partially offset by stimulus measures. We think that China’s authorities will allow for periods of controlled FX weakness but not opt for sizable depreciation. For Mexico, we think volatility will persist amid the threat of tariffs. While we believe President Claudia Sheinbaum’s collaborative and effective approach to U.S.-Mexico relations will continue, this will likely be a multi-round process with components of the USMCA review eventually brought into these discussions. At the same time, the soft 4Q GDP data and stabilized MXN in the aftermath of the tariff delay allowed Banxico to deliver a 50bps rate cut this week and to signal room for further easing.
Grenell-Maduro Meeting in Caracas Signals Trump Administration Pragmatism
Event: A first formal meeting between an official from the Trump 2.0 Administration, “Special Missions Envoy” Richard Grenell, and Venezuela’s de-facto President Nicolas Maduro, took place in the Miraflores Palace in Caracas. Following the meeting, actively publicized by Maduro, Venezuela granted the release of six U.S. prisoners and agreed to receive all undocumented Venezuelan migrants from the U.S., including members of the Tren de Aragua criminal group. In the meantime, the Chevron OFAC license automatically renewed for six months on February 1st, as it does at the start of every month.
Gramercy Comment: The Grenell-Maduro meeting in Caracas seems to confirm our perception that, despite hawkish rhetoric against the Maduro regime from Secretary of State Marco Rubio, the official U.S. policy on Venezuela at the start of the Trump 2.0 Administration leans on the side of pragmatism. This contrasts with the failed “maximum pressure” approach under the first Trump Administration. Importantly, we interpret engagement via the Grenell channel as an opening for further dialogue and a strong signal that U.S.-Venezuela diplomatic relations are likely to be managed mostly directly from the Oval Office rather than the State Department.
From a market perspective, this is credit-positive, as it is likely to keep Venezuela “open for U.S. business” in the near term, and could, over time, lay the ground for potential domestic political re-arrangement that would be required for future negotiations over sovereign debt restructuring. For 2025, we remain optimistic that the Trump Administration and Maduro cooperate on migration and oil licenses. Against this backdrop, we see room for continued progress towards more substantial deal-making and constructive relations if deportation flights are successfully resumed and regional and legislative elections are held as announced in April, where a subset of the opposition may participate.
Daniel Noboa is Favored to Win Ecuador’s Presidency on Sunday or in Second Round
Event: Ecuador’s Presidential and Legislative elections will take place this Sunday, February 9th. If no presidential candidate meets the criteria for winning in the first round, a second-round runoff in April between the two top candidates will determine Ecuador’s next President.
Gramercy Comment: Based on the latest polls, it appears that Daniel Noboa, Ecuador’s market-friendly incumbent President, has a chance to win outright in the first round on Sunday. But even if re-election does not materialize this Sunday, Noboa seems set to at least cement his position as the frontrunner ahead of the potential head-to-head runoff in April against Luisa Gonzalez, an ally of populist former President Rafael Correa. Such an outcome will be seen as credit-positive by markets, which will associate a likely Noboa victory with continuation of reform momentum and cooperation with the IMF that propelled Ecuador’s sovereign bonds to being one of the top-performers in global EM in 2024.
We also note that Noboa’s party appears likely to come close to a simple majority in the National Assembly and needs only a few allies from non-Correista parties in order to form a working legislative majority. Such an outcome should translate into better governability and stability compared to Noboa’s current term and would also bode well for the next administration’s ability to pass reforms and continue on the path of fiscal consolidation. Improvement on the fiscal side under the next president would be critical to help the sovereign re-access global capital markets later this year ahead of external financing needs, which are set to increase from 2026 onwards.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of February 7, 2025.
For questions, please contact:
Simon Quijano-Evans, Managing Director, Chief Strategist, [email protected]
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
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