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Emerging Market Debt Market Commentary: January 2024

Emerging market (EM) debt had a cautious start to the year, having experienced a strong rally towards the end of 2023. Inflation continued to soften across the board, with the consumer price index (CPI) data for December maintaining the downward trend. Hopes that the Israel-Hamas war would not be prolonged for an extended period ebbed, with rising fears of a further escalation weighing on risk sentiment. The threat of a wider Middle East conflict and ongoing attacks on shipping in the Red Sea contributed to a higher in oil price in January, with a knock-on impact on the local bond returns of some of the EM economies with a higher beta towards commodity prices. In China, weakness in property and consumption sectors continued to be a drag on economic progress. The People's Bank of China (PBoC) held its lending rates unchanged in its January meeting. However, the PBoC announced a reduction in the reserve requirement ratio (RRR) for all banks of 50 basis points (bps) to 10% from February 5, releasing up to 1 trillion yuan ($139.45 billion) to the market to boost the economic recovery.

The US Federal Reserve (Fed) left its overnight federal funds rate unchanged at the current range of 5.25%-to-5.5%. A more resilient US economy and a stronger dollar impacted the monetary policy stances of some central banks in EM Asia, with the market pushing out the timing of rate cuts to later in the year. By comparison, central banks in Latin America (LatAm) (especially Brazil and Chile) continued on their monetary easing path. Meanwhile, the approach to monetary policy in central Europe was more mixed. While Poland’s central bank kept interest rates unchanged, Hungary has commenced lowering its benchmark rate. The broad investor optimism on probable convergence of monetary policies between emerging markets and their developed markets counterparts improved as the month progressed.

Net flows in January were negative for both hard currency and local currency funds, amounting to -$1.9bn and -$0.7bn, respectively (source: JP Morgan).

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