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
Global markets were once again impacted by a combination of AI-related market churn and private credit concerns, along with geopolitics as the situation in the Middle East grew increasingly tense. This resulted in the S&P 500 losing -0.4% and the Euro Stoxx 50 gaining +0.1%, while emerging markets (EM) equities gained +2.8%. The US rates curve bull flattened, with 5-year yields down 15 basis points (bps) and 30-year yields down 11bps. 10-year US real rates were 11bps lower to end the week at 1.68%.
In EM credit markets, spreads were 9bps wider for corporates and 14bps wider for sovereigns, while total returns were up +0.3% and +0.1%, respectively. In the corporate space, the diversified and pulp & paper sectors outperformed, while the transport and consumer sectors underperformed. In the sovereign space, the notable performers were Senegal and Brazil. The biggest underperformers were Venezuela, Argentina, and Pakistan.
In EM local markets, returns were up +0.6%, with foreign exchange (FX) contributing +0.3% and rates +0.3%. In the FX space, outperformers were the Dominican peso, Brazilian real, and Hungarian forint, while the underperformers were the Colombian peso and Chilean peso. Meanwhile, in the rates space, the Dominican Republic, Thailand, and Uruguay outperformed, and Colombia and Serbia underperformed.
Market highlights
The situation in Iran has dominated global risk markets over the past week as coordinated US-Israeli airstrikes on military and leadership targets escalated into a wider regional confrontation. This prompted Iran to fire drones and ballistic missiles at Israel and US bases and briefly close the Strait of Hormuz, disrupting oil and gas flows. The oil price remains the key conduit for contagion to markets given the read-across to inflation and a stronger US dollar.
Market outlook
Geopolitics has moved back to the forefront for markets, with the conflict in the Middle East pushing oil prices higher and fuelling concerns about inflation and the ability of central banks to deliver on easing cycles. The immediate market reaction has been a stronger US dollar, with previously popular trades in EM equities and EM FX coming under some pressure as investors unwind positions. However, the moves have been relatively muted and appear to reflect profit-taking in some of the best performing trades of the past year rather than a broader shift in risk sentiment. At the same time, private credit concerns continue to linger in the background and remain a potential risk factor, alongside the ongoing AI disruption theme, which could continue to drive volatility and sector rotation in equity markets.
Looking ahead, much will depend on the duration of the conflict and any resulting supply disruptions in oil and gas markets, both of which remain difficult to forecast at this stage. While recent US communication has suggested a campaign lasting roughly 4–8 weeks, the situation remains highly uncertain. Against this backdrop, investors may look to modestly reduce risk in the near term given the difficulty of assessing the potential impact on oil prices, inflation, and the US dollar. Our base case remains that EM fixed income is well positioned over the medium term, though maintaining a slightly lower risk stance in the short term appears prudent given elevated uncertainty.
