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Emerging Market Debt Market Commentary: August 2023

Emerging market (EM) debt in August produced negative returns, marking a reversal in momentum that prevailed earlier in July on the back of EM investment grade/high yield (IG/HY) compression. Despite softening inflation prints across the board, EM assets witnessed weaker risk sentiment, caused by surge in US Treasury yields and negative growth headlines from China. Growth data released in China highlighted the real estate sector’s drag on the economic recovery. The need for targeted policy measures by the Politburo was magnified by slower-than-expected consumption recovery in China and soaring unemployment. Uncertainties around China’s growth forecasts weighed on investor sentiment as markets continued to analyze possible opportunities contingent on Chinese stimulus packages.

In an effort to bolster the shaky economy and weakening local currency yuan, the People's Bank of China (PBoC) lowered its one-year loan prime rate (LPR) by 10bps to 3.45%, which is a record low. The PBoC, however, held its five-year rate (mortgage reference rate) at 4.2%, contrary to expectations. The central bank of Brazil commenced monetary easing with a 50bps rate cut in August, taking the key Selic rate to 13.25%. A disinflationary trend was observed in central Europe, with Poland and Czech Republic reporting softer inflation data in August. Oil prices increased in August by 2.24%, a move reflective of a dip in inventory levels reported in the US and ongoing OPEC+ production cuts. Some EM economies with a higher beta towards oil prices (especially South Africa) were impacted as a result.

Cascading effects from China’s growth prospects, relatively more resilient US economic data, and widening spreads lead to heavy outflows, especially for EM hard currency funds. Net flows in August for hard currency and local currency funds were -$6.7bn and -$2.3bn, respectively (source: JP Morgan).

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