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

This past week saw robust US corporate earnings and ongoing expectations around AI capex offset higher oil prices and higher core yields as tensions continued to rise in the Middle East. This resulted in the S&P 500 gaining +0.9% and the Euro Stoxx 50 being unchanged, while Emerging Markets (EM) equities lost -0.5%. The US rates curve saw a bear flattening, with 5-year yields up 10 basis points (bps) and 30-year yields up 5bps. 10-year US real rates were unchanged to end the week at 1.87%.

In EM credit markets, spreads were 9bps tighter for corporates and 2bps tighter for sovereigns, while total returns were flat on the week for both. In the corporate space, the industrials and oil & gas sectors outperformed, while the transport and telecom sectors underperformed. In the sovereign space, notable performers included Angola, Venezuela, and Bolivia. The biggest underperformers were El Salvador and Bahrain.

In EM local markets, returns were down -0.5%, with foreign exchange (FX) contributing -0.2% and rates -0.3%. In the FX space, outperformers were the Hungarian forint, Brazilian real, and Serbian dinar, while underperformers were the Colombian peso, Romanian leu, and Uruguayan peso. In the rates space, the Dominican Republic, Hungary, and Serbia outperformed, while Colombia and South Africa underperformed.

Market highlights

• The United Arab Emirates (UAE) announced that it would exit from OPEC, signalling differences with Saudi Arabia over regional influence and economic competition. While the current Strait of Hormuz closure limits near-term oil market implications, the longer-term effects are significant: as the fourth-largest OPEC+ producer, accounting for ~8% of supply, the UAE's planned capacity expansions will meaningfully boost global energy supply once the strait reopens.

Market outlook

Markets remain calm despite heightened geopolitical volatility around US-Iran negotiations and the Strait of Hormuz closure. While both sides continue to signal willingness to engage, President Trump's announcement of Operation "Project Freedom" and competing claims over shipping security suggest negotiations remain fragile and that both sides continue to seek further leverage to give them the upper hand in negotiations. Oil prices have stabilised but remain well above the psychological USD100/bbl level, and the risk of further spikes on prolonged supply disruption is very real. Alongside the geopolitical noise, a resilient first quarter (Q1) earnings season—particularly strength in AI-linked capex and tech mega-caps—has provided a meaningful counterweight, with equities grinding to fresh all-time highs. Treasury yields, meanwhile, have borne the brunt of the pain from higher oil prices, with a bear flattening move that has seen yields 11bps higher on the week at the front end of the curve. Expectations for Federal Reserve (Fed) pricing have also shifted ~10bps in a hawkish direction, with minimal rate cuts now priced for this year.

In fact, the hawkish shift has been pronounced across developed markets, with European Central Bank (ECB) speakers repeatedly flagging June hike risks and the Reserve Bank of Australia (RBA) delivering its third consecutive hike to 4.35%. This tightening impulse reflects rising stagflationary concerns from elevated energy costs, though the risk remains that extended geopolitical disruption could force central banks into a policy error if they tighten into weakening growth.

For EM fixed income, the energy shock continues to drive meaningful dispersion. Commodity exporters, particularly in Latin America, remain better positioned given structurally elevated oil prices and positive earnings momentum, whilst Asian importers face dual headwinds from higher energy costs and growth deceleration. EM credit spreads remain tight, but all-in yields provide a cushion for total returns. Primary issuance has remained steady with strong inflows (~USD3.6 billion this week), though the risk is that if geopolitical tensions extend materially beyond current timeframes, markets will reprice growth and inflation assumptions more substantially. FX has proven reasonably resilient but rising inflation expectations continue to weigh on rates markets. We maintain a bias towards Latin America and those countries and companies that are more resilient to higher energy prices, with tactical value likely to emerge once the contours of a diplomatic solution become clearer.