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
Renewed geopolitical concerns and higher oil prices weighed on markets this week. This resulted in the S&P 500 losing -0.6% and the Euro Stoxx 50 gaining +0.8%, while emerging markets (EM) equities gained +0.5%. The US rates curve saw a bear flattening, with 5-year yields up 15 basis points (bps) and 30-year yields up 9bps. 10-year US real rates were 14bps higher to end the week at 2.43%.
In EM credit markets, spreads were 2bps tighter for corporates and 3bps wider for sovereigns, while total returns were down -0.4% and down -0.9%, respectively. In the corporate space, the infrastructure and banks sectors outperformed, while the transport and consumer sectors underperformed. In the sovereign space, the notable performers were Senegal, Mozambique, and Iraq. The biggest underperformers were Ukraine and the Philippines.
In EM local markets, returns were down -0.5%, with foreign exchange (FX) flat and rates contributing -0.5%. In the FX space, outperformers were the Colombian peso, Brazilian real, and Dominican peso, while underperformers were the South African rand, Chilean peso, and Serbian dinar. In the rates space, the Dominican Republic, Uruguay, and Romania outperformed, while South Africa, Colombia, and Poland underperformed.
Market highlights
In South Korea, the Korea Composite Stock Price Index (KOSPI) volatility continued as investors began to question the longevity of the AI trade. The KOSPI has now fallen by more than 40% from its peak and it has prompted action from regulators in South Korea as they seek to limit retail participation in levered products related to the index.
Market outlook
Markets have remained dominated by the ongoing conflict in the Middle East, with Iranian missile attacks, US retaliation, and Strait of Hormuz uncertainty driving significant oil volatility. At the time of writing, Brent crude was trading at around USD90/bbl, representing a sharp rally from lows of USD71/bbl at the start of the month as geopolitical risk premia has been priced back in. Attention has also shifted to this week's Federal Reserve (Fed) meeting, where policymakers are widely expected to leave rates unchanged despite higher energy prices, with softer underlying inflation and moderating domestic demand allowing the Fed to remain patient. Rates markets have become increasingly comfortable looking through the current oil shock unless it evolves into a more persistent inflationary impulse, with real yields having risen to multi-year highs but nominal Treasury yields stabilising as oil prices have retreated.
Tech sector weakness in Asia has posed a near-term headwind, with the KOSPI and Nikkei lagging after sharp declines in chipmakers due to renewed worries over AI investment circular financing and competition from Chinese semiconductor producers. This has created notable regional differentiation across EM, with Asia's energy-importing economies remaining more exposed to sustained, elevated oil prices, while commodity exporters and Latin America have held up relatively better.
For EM fixed income, the backdrop remains supportive for selective risk-taking, despite elevated geopolitical uncertainty. Commodity exporters, particularly oil-producing sovereigns, continue to benefit from stronger terms of trade. All-in yields remain attractive given benign default expectations, whilst most EM central banks are likely to remain more patient than current market pricing implies. We therefore continue to favour carry opportunities in EM credit, while expecting local markets to remain more volatile as US rates and monetary policy, energy prices, and geopolitical headlines continue to dominate near-term performance.
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