Senior Portfolio Manager Anthony Kettle’s weekly BlueBay Emerging Market Debt commentary offers readers a concise yet wide-ranging macro overview. Kettle covers markets large and small, providing insight on how financial, political, and economic developments in one region affect markets elsewhere. Here is his latest insight.

Summary

Risk markets rebounded last week after Federal Reserve Chair Kevin Warsh gave a more benign interpretation of recent trends in inflation when he spoke at the Sintra Forum conference. This resulted in the S&P 500 gaining +1.7%, and the Euro Stoxx 50 gaining +1.5%, although emerging markets (EM) equities lost -4.1%. The US rates curve saw a bear steepening, with 5-year yields up 7 basis points (bps) and 30-year yields up 12bps. 10-year US real rates were 7bps higher to end the week at 2.25%.

In EM credit markets, spreads were 5bps tighter for corporates and flat for sovereigns, while total returns were flat and down -0.2%, respectively. In the corporate space, the real estate and utilities sectors outperformed, while the oil & gas and consumer sectors underperformed. In the sovereign space, the notable performers were Ukraine and Mozambique. The biggest underperformers were Zambia, Senegal, and Bahrain.

In EM local markets, returns were up +0.6%, with foreign exchange (FX) contributing +0.4% and rates +0.2%. In the FX space, the outperformers were the Colombian peso, South African rand, and Malaysian ringgit, while the underperformers were the Indian rupee, Chilean peso, and Dominican peso. In the rates space, Colombia, Poland, and Turkey outperformed, while Mexico, Uruguay, and Brazil underperformed.

Market highlights

• The US declined to automatically renew the United States-Mexico-Canada Agreement (USMCA), opting instead for annual reviews that will focus on American priorities: reducing the trade deficit with Mexico, rebalancing regional supply chains, and preventing China from circumventing tariffs through nearshoring. The US is pushing for stricter automotive rules of origin—requiring 50% US component content and raising the overall regional value-content threshold from 75% to over 80%—alongside demands for unified export controls on China.

• Mexico's central bank held its benchmark rate steady at 6.50%, with an open-ended pause signalling that any further rate cuts remain contingent on further disinflationary momentum, rather than being on a predetermined timeline. Meanwhile, Colombia faces political uncertainty as the country navigates a leadership change, which is scheduled for 7 August, when the new President will be sworn in.

Market outlook

Macro concerns have intensified following a significant escalation in US-Iran tensions overnight, with American forces striking over 80 Iranian targets in response to attacks on commercial shipping in the Strait of Hormuz. The US Treasury's simultaneous revocation of the Iranian oil sales waiver threatens to undermine the fragile interim peace agreement reached last month, pushing Brent crude higher to USD76/bbl. Alongside these geopolitical headwinds, yields have repriced sharply higher across developed markets, with 10-year US Treasury yields now above 4.55%, driven by a spike in one-year inflation expectations to 3.7%, the highest since September 2023. The tech sector has also experienced notable volatility, with the KOSPI pulling back 20% from peaks, reflecting broader concerns that rising yields pose headwinds for growth-sensitive equities with longer-dated cash flows. While the tech and semiconductor sectors have undergone a correction, this largely reflects an unwinding of crowded positioning, rather than signalling fundamental deterioration.

For emerging market fixed income, the current backdrop remains broadly supportive despite near-term geopolitical uncertainty. Investors are monitoring the Middle East closely but largely expect to look through the current escalation, as few anticipate a return to full-scale conflict. Critically, oil prices have shown resilience even amid the conflict, failing to breach USD100/bbl for a sustained period. Concerns have subsequently emerged about a potential overshoot to the downside once a truce was announced. This dynamic is likely to provide comfort to investors, given that higher oil prices remain the primary channel through which geopolitical tensions could meaningfully impact financial markets. All-in yields continue to offer reasonably attractive valuations despite historically tight spreads, with active primary issuance providing further opportunities. We maintain our preference for Latin America, viewing it as more resilient to geopolitical risk with more positive idiosyncratic drivers, while continuing to see value in emerging market local currency markets, preferring a strategy of funding via a basket of G7 currencies to diversify against ongoing US dollar resilience.