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

It was a strong week for risk markets, despite a turbulent geopolitical backdrop, with the S&P 500 gaining +1.6% and the Euro Stoxx 50 gaining +2.5%, while emerging markets (EM) equities also gained +1.6%. The US rates curve twist flattened, with 5-year yields rising 1 basis point (bp) and 30-year yields falling 6bps. 10-year US real rates declined 5bps to end the week at 1.86%.

In EM credit markets, spreads were -2bps tighter for corporates and flat for sovereigns, while total returns were both up +0.2%. In the corporate space, the telecommunications and metals & mining sectors outperformed, while the real estate and infrastructure sectors underperformed. In the sovereign space, the notable performers were Venezuela, Senegal, and Ukraine, while the biggest underperformers were Ghana, Nigeria, and Paraguay.

In the EM local markets, returns were flat with foreign exchange (FX) contributing -0.1% and rates +0.1%. In the FX space, outperformers were the Colombian peso, Brazilian real and Chilean peso, up +1.7%, +1.5% and +1.1%, respectively, while underperformers were the Hungarian forint, Czech koruna and Polish zloty, which declined -1.5%, -1.4% and -1% respectively.

Market highlights

• The Trump administration announced a deal allowing the US to purchase and market Venezuelan crude oil, while providing Venezuela with diluents and partial sanctions relief, in an agreement that should benefit both parties: Venezuela would alleviate storage constraints, boost revenue by accessing its most profitable US market, and resolve diluent shortages, while the US supports Gulf Coast refiners in Trump-aligned states and sidelines adversaries like China, Russia, and Iran involved in Venezuela’s oil sector. However, internal Venezuelan dynamics remain fragile, with interim leader Delcy Rodriguez dependent on powerful figures like Diosdado Cabello and Vladimir Padrino, who face US indictments and have few alternatives. Despite President Trump’s backing for Rodriguez, tensions persist over expanding US demands and regime hardliners. Meanwhile, investors will also be hoping that the existing political setup in the country gradually moves towards a point where elections can be held that ultimately facilitate a democratic regime change, a move that is still a long way off.

• In Iran, protests have spread across all 31 provinces, with an estimated 1-2 million participants, a scale that would surpass the 2022 Mahsa Amini protests and rival the 1979 Iranian Revolution. The regime has implemented a country-wide communications and internet blackout, which is hampering efforts to assess the full scope of the protests, but the regular army has now been put on alert. Meanwhile, the US is moving military assets to the region which raises the prospect of a near-term US intervention.

Market outlook

The near-term market outlook is likely to be shaped by elevated policy and geopolitical uncertainty, which could translate into bouts of volatility across risk assets. In the US, legal and institutional questions — including the ongoing criminal investigation into Federal Reserve Chair Jerome Powell and uncertainty surrounding the Supreme Court’s stance on the scope and legality of tariffs — risk unsettling market confidence around the US policy framework. At the same time, the geopolitical backdrop remains fluid, with recent developments such as the removal of the Maduro regime in Venezuela and renewed protests in Iran adding to global risk premia, particularly in energy-linked markets. While these factors may weigh on risk sentiment episodically, they are not yet derailing the broader macro narrative of slowing US growth and a less supportive dollar environment.

Against this backdrop, emerging markets fixed income continues to stand on solid footing. Anticipated US dollar weakness should provide a supportive tailwind for both EM currencies and external debt, while many EM economies still offer compelling real yields following prolonged periods of restrictive monetary policy. In the hard-currency credit space, all-in US dollar yields remain attractive, and the default outlook appears benign given improved sovereign balance sheets, manageable refinancing needs, and improved policy discipline in many cases. Importantly, the asset class is also benefiting from a constructive technical backdrop, with positive inflows reflecting renewed investor demand for carry and diversification. Taken together, these factors support our expectation for a favourable near-term environment for both EM local-currency and hard-currency debt, notwithstanding intermittent volatility driven by global events.