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 Iran war and ensuing volatility in energy prices dominated the market's attention this week. This resulted in the S&P 500 losing -1.9% and the Euro Stoxx 50 losing -3.8%, while Emerging Markets (EM) equities also lost -0.4%. The US rates curve bear flattened with 5-year yields 15 basis points (bps) higher. 10-year US real rates were 10bps higher to end the week at 2.00%.

In EM credit markets, spreads were 3bps wider for corporates and 10bps wider for sovereigns, while total returns were down -0.6% and -1.1%, respectively. In the corporate space, the diversified and oil & gas sectors outperformed, while the real estate and transport sectors underperformed. In the sovereign space, the notable outperformers were Venezuela, Gabon, and Angola. The biggest underperformers were Ukraine, Senegal, and Mozambique.

In the EM local markets, returns were down -0.4% with foreign exchange (FX) contributing -0.1% and rates -0.3%. In the FX space, outperformers were the Dominican peso, Hungarian forint, and Romanian leu, and underperformers were the Thai baht, Indian rupee, and Chilean peso. Meanwhile, in the rates space, Czech Republic, Colombia, and Romania outperformed and Dominican Republic and South Africa underperformed.

Market highlights

• The war in Iran, and the associated energy price spike, continues to impact EM central bank actions. Brazil's Banco Central do Brasil (BCB) recently delivered a 25bps cut, smaller than some market participants had pencilled-in, in recognition of inflationary pressures. Mexico's easing cycle is also likely to now be more muted. In EMEA, Romania and Hungary are likely to see inflationary concerns rising, especially as they see weaker FX, and this could trigger hikes. Finally, in Asia, easing is likely to be delayed in China and Indonesia, while countries such as the Philippines may need to hike rates. The days of synchronised monetary easing are clearly in the rear-view mirror, with inflationary impacts affecting some countries within EM more severely than others, leading to higher levels of policy divergence.

Market outlook

The current Iran-led supply shock shows no sign of abating for now but remains the clearest pressure point for the US administration. It should also be noted that while oil itself remains the focal point, the disruption extends meaningfully into critical inputs such as fertilisers and helium, amplifying second-order inflationary pressures across industrial supply chains. Unlike prior cycles, markets are only partially pricing this dynamic: inflation expectations are moving higher—most notably in the UK and Europe—but the full pass-through, particularly in the US, remains underpriced. At the same time, the traditional cross-asset playbook is breaking down, with rates and equities selling off in tandem, reflecting a tightening of financial conditions rather than a clean growth shock. The key for markets will be the duration of this shock, rather than simply the magnitude, and there are signs that the US administration may be seeking an off-ramp, although there is conflicting messaging as they are reinforcing military assets in the Middle East at the same time.

It is a sideshow for now, but on the private credit front, there has been more news around two funds in particular gating redemptions, as well as the emergence of a secondary pricing market, which will aid price discovery and may ultimately lead to a healthier dynamic there as risks are better priced.

From an EM perspective, the energy price moves are driving a clear regional divergence and reinforcing a more selective, relative-value approach. Asia appears most exposed given its dependence on imported energy and pressure on industrial margins, while Central and Eastern Europe (CEE) face a stagflationary squeeze despite limited direct reliance on Gulf supply. By contrast, parts of Latin America are better positioned to benefit from improved terms of trade. Certain markets, however, have yet to fully reflect the tightening in underlying conditions, with rates markets doing a better job of reflecting the changing narrative as compared to credit spreads that remain relatively contained. In this environment, we remain cautious on broad beta exposure, favouring defensive positioning, selective shorts in Asia and CEE, and focussing long positioning on those that are benefitting from a positive terms of trade shock as a result of the crisis.