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

The war in Iran continued to dominate the headlines this week with no real signs of progress towards a ceasefire. However, markets proved resilient with the S&P 500 gaining +1.6% and the Euro Stoxx 50 gaining +2.3%, while emerging markets (EM) equities lost -1.0%. The US rates curve bull steepened with 5-year yields down 14 basis points (bps) and 30-year yields down 5bps. 10-year US real rates were 13bps lower to end the week at 1.95%.

In EM credit markets, spreads were 8bps wider for corporates and 14bps wider for sovereigns, while total returns were up +0.1% and +0.2%, respectively. In the corporate space, the transport and pulp & paper sectors outperformed, while the utilities and infrastructure sectors underperformed. In the sovereign space, the notable performers were Pakistan, El Salvador, and Uruguay. The biggest underperformers were Senegal, Venezuela, and Egypt.

In the EM local markets, returns were up +0.4% with foreign exchange (FX) contributing +0.2% and rates +0.2%. In the FX space, outperformers were the Brazilian real and Hungarian forint, and underperformers were the Malaysian ringgit and Indonesian rupiah. Meanwhile, in the rates space, Turkey, Brazil, and Hungary outperformed and India underperformed.

Market highlights

• El Salvador's 3 April macro test failure triggered the coupon step-up on its 17 April payment, with the annual rate jumping from 0.25% to 4%, a USD18 million increase in the semi-annual payment. The failure reflected the country's inability to complete an International Monetary Fund (IMF) board review within six months or achieve composite B/B2 credit ratings. However, markets have largely shrugged off this event, as it was well-telegraphed and already priced into interest-only (IO) bonds. Investor focus has shifted to external risks rather than this domestic setback, and the upcoming Spring Meetings now present an opportunity to reframe the narrative around positive IMF developments.

Market outlook

Markets have rallied sharply on reports of a two-week US bombing postponement and Iran's conditional agreement to open the Strait of Hormuz in exchange for transit fees—a compromise signalling that negotiations are gaining momentum and the US is seeking an off-ramp to the war. However, significant headwinds remain with Iran's nuclear ambitions unaddressed in their 10-point proposal, whilst the proposed toll on transit through the Strait of Hormuz is likely unacceptable to US allies, and any ceasefire will be fragile given concerns around escalation from proxies. From a macro perspective, even if the Strait reopens, energy supply normalisation will take months, disproportionately benefitting the US and other energy exporters, while maintaining pressure on energy-importing Asian economies and Europe. If the ceasefire does hold, with the right-side tail risk now lower in oil markets, then the front ends of many rates curves should have room to reprice towards lower yields, which in turn should provide support to risk markets. Risk assets are therefore likely to remain volatile, but investors are likely to begin slowly re-engaging with markets here.

In emerging markets, the fragile geopolitical resolution will mean lower oil prices in the short term but still much higher oil prices than were expected at the start of the year. Supply issues will also take time to resolve. We expect that this will mean that in the local markets, Latin America should outperform South East Asia given the former's commodity producer status and reduced energy import vulnerability. Meanwhile, in the credit space, spreads remain relatively tight as compared to historical levels, but all-in yields should remain supportive of the total return backdrop.