I think it’s supposed to be a “feature”, it merges all libraries from your local and external drives into one view, instead of only showing your local library like in Rekordbox.
I don’t use Sync Manager and don’t have a local library. Instead I copy my tracks to an external drive into the folder structure that I want, and drag them from there into Engine DJ, meaning they are added to the Engine library on the external drive. These changes can then be synced to a backup drive using rsync.