May Review:

• May was dominated by escalating US-Iran tensions and the resulting volatility across global markets. Early optimism surrounding a potential peace agreement on 6 May briefly eased fears, sending Brent crude lower from almost $115/bbl towards $100/bbl. However, hopes of a durable resolution quickly faded as renewed military activity, conflicting signals from policymakers and concerns over the security of Middle Eastern energy infrastructure reignited risk aversion. Markets were particularly focused on the risk of disruption to shipping through the Strait of Hormuz, given its critical role in global oil supply. By mid-month, sentiment had deteriorated sharply, driving a broad sell-off across rates markets as investors reassessed the inflationary implications of higher energy prices. US Treasury yields reached their highest levels since 2007, while bond yields in Germany and Japan also moved to multi-year highs. Despite several reports of imminent ceasefires and renewed diplomatic engagement, market sentiment remained highly sensitive to developments throughout the month. Brent crude ultimately ended May at $92.05/bbl after falling 19.3%, its largest monthly decline since March 2020, while developed market equities proved remarkably resilient, with the S&P 500 rising 5.3%, the Nikkei gaining 11.9% and South Korea’s KOSPI advancing 28.5%. Gold declined 1.7% as real yields moved higher and inflation concerns moderated towards month-end.

• EM credit markets delivered positive returns, with corporates returning +0.38% and sovereigns, +1.00%, predominantly driven by higher yielding assets. Spreads tightened by 5bps for corporates and 10bps for sovereigns. Within corporates, the Transport, Real Estate and Industrial sectors outperformed with only Pulp & Paper detracting over the period. In sovereigns, Africa and Europe contributed the most. Local markets also delivered positive returns over the month, with the index returning +0.85% for the month. This was driven by positive performance in both FX and Rates, which returned +0.07% and +0.79% respectively. At the country level, South Africa, Hungary and Peru contributed to returns over the period. However, Indonesia and Turkey detracted from performance.

Looking to Emerging Market News:

• Romania experienced renewed political uncertainty after the collapse of the governing coalition following a no confidence vote. The political crisis threatens progress on fiscal consolidation efforts and could delay access to billions of euros of EU recovery funding. Investors have been watching closely given Romania’s large fiscal deficits and financing requirements. The episode highlights the growing influence of nationalist parties across parts of Eastern Europe and raises questions over the pace of future reforms and budget adjustments. 

• Hungary remained in focus after Prime Minister Péter Magyar’s new government secured agreement from the European Commission to unlock €16.4bn of previously frozen EU funds. The move follows a series of governance, judicial and anti-corruption reforms after the end of the 16 year Orbán era. The funding is expected to support infrastructure investment, economic growth and investor confidence, while helping stabilise the forint. Markets viewed the development as a significant improvement in Hungary’s relationship with Brussels and a potentially positive medium term credit story. 

• Colombia’s presidential election delivered a surprise result as right wing outsider Abelardo de la Espriella narrowly beat left wing candidate Iván Cepeda in the first round, with neither securing an outright majority. The outcome sets up a highly polarised runoff on 21 June, effectively becoming a referendum on the legacy of President Gustavo Petro. Security, crime, fiscal management and peace negotiations with armed groups remain the dominant campaign themes. Markets will be closely watching the runoff given Colombia’s fiscal challenges, importance within EM debt indices and the potential implications for investment, energy policy and relations with international investors. 

• Turkey remained in the spotlight during May as political tensions escalated following a court ruling that removed Özgür Özel as leader of the main opposition CHP party and reinstated former leader Kemal Kılıçdaroğlu. The decision triggered mass protests, deepened concerns over judicial independence and sparked renewed scrutiny of Turkey’s democratic institutions. The developments follow the earlier imprisonment of Istanbul Mayor Ekrem İmamoğlu, widely viewed as the opposition’s strongest future presidential challenger. Markets reacted negatively, with Turkish assets coming under pressure amid fears of increasing political instability. The episode has intensified speculation around the possibility of an early election, although the next scheduled presidential and parliamentary elections are not due until 2028. 

Outlook

Easing geopolitical tensions are providing very supportive tailwinds for global markets as the Iran deal negotiations appear close to a definitive resolution, with the repatriation of Iran's frozen assets remaining the final sticking point. Early signs of tangible de-escalation, including a recovery in Strait of Hormuz shipping volumes and lifted internet blackouts, suggest an official announcement could materialise within days. This diplomatic reprieve has successfully lifted equities to all-time highs and driven sharp US Treasury (UST) rallies, a move further bolstered by accelerating AI driven momentum across tech and infrastructure names. Concurrently, central bank policy remains at a critical inflection point, highlighted by the RBNZ signalling sooner and larger rate hikes, while hawkish ECB commentary has pushed June hike pricing significantly higher. Central banks globally now face a delicate balancing act as they attempt to distinguish between transitory supply side energy shocks and genuine second round effects, all while keeping long term inflation expectations anchored.

Emerging market fixed income has gained considerable momentum from positive outcomes in Colombia's first-round elections, providing particular tailwinds to Latin American assets. In EM credit, attractive all-in yields continue to anchor investor interest, and a potential near-term geopolitical relief rally is drawing fresh inflows, with hard currency bonds capturing the majority of flows last week. We maintain our preference for Latin America and those EM economies benefitting from current terms of trade dynamics. Looking forward, we expect the asset class to sustain a positive bias as investors continue rebalancing portfolios toward higher EM allocations.

1Source: JPMorgan EMBI Global Diversified Index, JPMorgan GBI-EM Global Diversified Index, JPMorgan CEMBI Diversified Index, ICE BofA Diversified Local EM Non-Sovereign Index JPMorgan EMBI Global Diversified Investment Grade Index, JPMorgan EMBI Global Diversified High Yield Index.

1Source: JPMorgan EMBI Global Diversified Index, JPMorgan GBI-EM Global Diversified Index, JPMorgan CEMBI Diversified Index, ICE BofA Diversified Local EM Non-Sovereign Index JPMorgan EMBI Global Diversified Investment Grade Index, JPMorgan EMBI Global Diversified High Yield Index.