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

Geopolitics continued to drive oil prices higher this week, however, risk markets proved reasonably resilient once again with the S&P 500 and Emerging Markets (EM) equities gaining +0.5% and +0.8% respectively, though the Euro Stoxx 50 lost -2.9%. The US rates curve saw a bear flattening, with 5-year yields up 7 basis points (bps) and 30-year yields up 2bps. 10-year US real rates were 1bp lower to end the week at 1.88%.

In EM credit markets, spreads were 5bps tighter for corporates and 3bps wider for sovereigns, while total returns were flat and down -0.5% respectively. In the corporate space, the telecom and pulp & paper sectors outperformed, while the transport and real estate sectors underperformed. In the sovereign space, the notable performers were Senegal, Mozambique, and Bolivia. The biggest underperformers were Venezuela and Argentina where investor positioning has built up recently.

In EM local markets, returns were down -1.5% with foreign exchange (FX) contributing -0.9% and rates -0.6%. In the FX space, outperformers were the Colombian peso, Dominican peso, and Indonesian rupiah, while underperformers were the South African rand and Chilean peso. In the rates space, Dominican Republic, Uruguay, and Romania outperformed while Turkey and South Africa underperformed.

Market highlights

• Romania faces political turbulence after the PSD (Social Democratic Party, approximately 28% of MPs) exited the governing coalition and initiated a no-confidence vote against PM Bolojan, demanding his resignation. However, despite the noise, four of five plausible scenarios—including a successful no-confidence vote leading to a reshuffled pro-EU majority, a PSD retreat, or Bolojan building a new majority without PSD—maintain the EU-anchored fiscal consolidation path and access to EU funds that constrain fiscal policy. Only a PSD-AUR (Alliance for the Union of Romanians) government would materially loosen fiscal policy and risk EU funding delays, a lower-probability tail risk given presidential and external guardrails.

Market outlook

Markets are on the back foot this week as the Iran-US negotiations remain at an impasse, with both sides maintaining blockades around the Strait of Hormuz as they seek leverage in negotiations. Whilst both parties have shown a clear willingness to engage in order to avoid further military escalation, they are also searching for pressure points and areas of weakness that will give them a better negotiating position. Recent headlines suggesting that Trump has instructed aides to prepare for an extended Strait of Hormuz closure may be a potential leverage tactic, but it has sent oil prices higher again, with both Brent and WTI well above $100/bbl. Iran is expected to submit a revised proposal in the coming days but markets have begun to prepare for the possibility of a more protracted closure of the Strait, with longer-dated oil futures moving higher alongside core yields which have once again started to move higher.

It is also a busy week for central banks which will be a key focus given inflation expectations in Europe have moved significantly higher – a trend that is expected to be mirrored in other economies. Meanwhile, the Federal Reserve (Fed) is widely expected to hold this week with focus on Powell's transition commentary, though the key question remains the relative emphasis placed on inflation versus growth risks.

For EM fixed income, we expect the energy shock to continue driving significant dispersion. Commodity exporters—particularly Latin America—remain better positioned given structurally elevated oil prices, whilst Asian importers face dual headwinds from higher energy costs and growth deceleration. EM credit spreads remain tight but all-in yields are elevated versus pre-war levels, providing a cushion for total returns. However, should the geopolitical situation extend beyond a few more weeks, the risk is that markets will begin a larger repricing of growth and inflation assumptionswhich would weigh on spreads. In the local markets, FX has proven reasonably resilient given expectations of a medium term US dollar (USD) depreciation trend, but rising inflation expectations continue to weigh on rates markets. This is where value is likely to soon emerge as and when we see the contours of a diplomatic solution to the current crisis, but in the meantime, we remain more comfortable maintaining a bias towards Latin America as well as those countries and companies which are more resilient to (or even net beneficiaries of) higher energy prices.