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
Equity markets had a positive week, with the S&P 500 up 1.8% and the Russell 2000 up 1.4%. The Euro Stoxx 50 gained 1.4% and emerging-market (EM) equities returned 1.9%. The US rates curve was relatively unchanged, while US 10-year real yields were 1 basis point (bp) higher at 2.2%.
In EM credit markets, corporate and sovereign spreads were 2bps and 6bps tighter, respectively, while total returns were 0.2% for corporates and 0.5% for sovereigns. In EM corporates, outperformance came from the industrial and telecommunications sectors, while real estate lagged. In the sovereign space, Ukraine, Venezuela and El Salvador outperformed, while Chile, Colombia and Nigeria lagged.
In EM local markets, total returns were 2.8% on the week, with foreign exchange (FX) the key driver of performance. In the FX space, euro-linked currencies in Central and Eastern Europe (CEE) outperformed, along with higher-beta Latin American currencies, as investors inferred from President Trump’s actions that tariffs may be lower down on his agenda than previously thought. In the rates space, Turkey and Colombia were the two key outperformers.
Market highlights
Angolan bonds came under pressure, as headlines emerged outlining that the country was in default to a sanctioned lender, with the government stating it was unable to pay due to the sanctions.
It emerged that President Trump has lifted sanctions on Israeli settlers in the West Bank while stating that both Jordan and Egypt should accept Palestinians who may be displaced.
In Colombia, President Trump threatened to implement tariffs of between 25-50% on Colombian imports if planes carrying illegal immigrants were refused permission to land. Colombia subsequently agreed to the request.
Market outlook
Just as investors had become comfortable with the notion that President Trump’s early agenda would focus more on deregulation and immigration, they then had to deal with news that tariffs would be implemented at a rate of 25% on all Colombian goods within 24 hours. This threat came after the Colombian government initially refused to allow US military planes carrying Colombian illegal immigrants to land. This is likely a sign of things to come, with a more aggressive stance from the US being the norm. However, the more impactful event for markets was the claim by the Chinese artificial intelligence (AI) company DeepSeek that it had built an AI model to rival some of the best US models at a fraction of the price and using inferior chips, given US export controls. This news sent AI-related stocks tumbling, with Nvidia bearing the brunt of the pain. In our view, the relevance for broader markets is that if these moves continue, the spike in volatility may trigger unwinds of other popular trades, such as tech stocks in general or the US dollar. For now, markets have stabilised, but the potential for a VaR (Value at Risk) shock remains, even if it’s not the base case.
EM fixed income has traded with a mixed tone, given the volatile external backdrop. However, a low default rate and high yields within credit markets remain important anchors while high nominal and real yields in many cases are helping to offset some of the spot moves in FX. This new paradigm of unpredictable headlines is something investors will, unfortunately, have to get used to over the coming months, but we expect investors will become more used to dealing with them as time goes on and will, therefore, become less reactive. There is also the large unresolved question over how the US fiscal regime will play out, with any potential restraint on the spending side likely to be a key anchor for markets as it removes the right tail risk for US Treasury yields. That said, we think the clearest thematic right now is that investors will remain in wait-and-see mode for the coming days and weeks, given the uncertainties detailed above.
Performance for the week ending 24 January 2025
Source: Bloomberg, JPMorgan
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