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 week saw risk markets lower as renewed geopolitical tensions and concerns over the durability of the AI trade sent the S&P 500 down by -1.6%, while the Euro Stoxx 50 and emerging markets (EM) equities lost -0.6% and -4.1%, respectively. The US rates curve saw a bull steepening, with 5-year yields down 3 basis points (bps) and 30-year yields up 1bp. 10-year US real rates were flat to end the week at 2.29%.

In EM credit markets, spreads were 5bps wider for corporates and 7bps wider for sovereigns, while total returns were flat and down -0.2%, respectively. In the corporate space, the oil & gas and banks sectors outperformed, while the transport and consumer sectors underperformed. In the sovereign space, the notable performers were Venezuela, Gabon, and Iraq. The biggest underperformers were Bahrain and Egypt.

In EM local markets, returns were down -0.7%, with foreign exchange (FX) contributing -0.4% and rates -0.3%. In the FX space, the outperformers were the Indonesian rupiah, Dominican peso, and Czech koruna, while the underperformers were the Hungarian forint, South African rand, and Indian rupee. In the rates space, the Dominican Republic, Peru, and Uruguay outperformed, while South Africa, Hungary, and Poland underperformed.

Market highlights

• In South Korea, the KOPSI suffered another volatile week and is now trading at levels last seen in late April, with the index down roughly -23% month-to-date, and with chipmakers Samsung Electronics and SK Hynix leading a broader semiconductor sell-off. This sharp pullback reflects mounting investor concerns over the sustainability of capital expenditure within the sector, which has triggered a notable reversal in investor sentiment over the past few weeks.

• It was a busy week for central banks. India's inflation accelerated to 4.38% year-over-year in June, breaching the Reserve Bank of India’s 4% target for the first time in 17 months, with geopolitical tensions and El Niño conditions posing upside risks via energy and food prices. Nigeria showed more progress, with June CPI holding at 15.9%—below consensus—signalling modest disinflation momentum, though the prospect for rate cuts remains low. Meanwhile, Egypt maintained its cautious hold at 19% deposit rates for a third consecutive meeting amid ongoing regional tensions.

Market outlook

Geopolitical tensions have re-escalated this week, with both sides accusing one another of Memorandum of Understanding (MOU) violations, triggering renewed US strikes on Iranian targets and fresh disruption to shipping through the Strait of Hormuz. Oil has remained volatile, with Brent trading back towards USD90/bbl as markets price in a higher geopolitical risk premium, though prices remain well below the extreme levels feared earlier in the year. Offsetting this, a softer-than-expected US Consumer Price Index (CPI) report has eased inflation concerns, allowing markets to dial back near-term Federal Reserve tightening expectations, despite higher energy prices. In equities, the AI theme has lost momentum as performance has broadened, with equal-weighted indices now outperforming their market-cap-weighted counterparts on the back of a resilient growth backdrop.

For EM fixed income, elevated geopolitical uncertainty combined with a more benign inflation environment leaves the asset class without a clear trend but also, importantly, with lower levels of volatility compared to its history. Overall, central banks appear content to adopt a cautious stance, buying time before committing to any policy shift given the high level of uncertainty around geopolitics. We expect that commodity exporters, particularly energy producers, will remain well-positioned, with higher oil prices supporting external balances, whereas Asian economies face greater exposure due to their reliance on the Strait of Hormuz shipping flows. Therefore, they are likely to see weaker trade balances and inflationary pressures. We do not expect oil prices to move through the previous highs set in March of this year at the height of the Iran conflict, but we do expect them to retain some geopolitical risk premium that should put a floor on prices at around USD70/bbl. Local markets are likely to remain the most volatile part of the asset class given uncertainty around inflation and the direction of the US dollar, but we also expect this to provide some of the most interesting opportunities over the coming months. Meanwhile, EM credit markets remain stable as a result of a benign default backdrop, coupled with still attractive levels of all-in yield, and a strong technical backdrop as inflows continue into the asset class.