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by  BlueBay Fixed Income teamA.Kettle Oct 3, 2024

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

It was a positive week for equity markets as the S&P 500 gained 0.6%, while European and emerging-market (EM) equities significantly outperformed on the back of Chinese stimulus measures, posting total returns of 4% and 6.2%, respectively. The US rates curve steepened, with 2-year yields 3 basis points (bps) lower and 30-year yields 2bps higher, while 10-year real yields ended the week 1bp higher at 1.59%.

In EM credit markets, corporate spreads were 3bps tighter and sovereign spreads were 2bps tighter, with total returns up 0.3% and 0.1%, respectively. In EM corporates, outperformance came from the real estate and consumer sectors, while oil & gas lagged. In the sovereign space, Africa as a region outperformed, with Egypt and Nigeria also contributing, along with El Salvador as hopes of a deal with the International Monetary Fund increased.

In EM local markets, total returns were up 0.8%, with foreign exchange (FX) outperforming. Asia outperformed in the FX space on the back of Chinese stimulus news. The Chilean peso also outperformed on the same theme.

Market highlights

  • In China, the government adjusted its policy stance, moving from a piecemeal style of easing to a more marked shift towards larger-scale stimulus specifically designed to prop up Chinese asset prices and stabilise the real estate market. Stimulus measures included a policy-rate cut, a cut in the reserve requirement ratio, property credit policy easing and capital-market support.

Market outlook

There is a goldilocks feel to markets right now, with the Federal Reserve (Fed) cutting rates into what still appears to be a resilient economy, and the Chinese government finally announcing a more substantial easing package in an attempt to halt the decline of the property market and stave off a deflationary cycle. This is playing out in solid EM fixed-income markets, with FX contributing notably. Both EM local rates and EM credit markets are also well supported. Anecdotally, it seems that the inflow narrative is also returning to EM, which should help fuel a positive technical backdrop. The obvious risk to markets, however, remains the uncertainty related to the US election. With polls too close to call, this will likely mean investors approach markets with some circumspection over the coming weeks. However, we do expect the solid fundamental backdrop to be a more important driver of returns for EM fixed income over the medium term.

Performance for the week ending 27 September 2024

Performance for the week ending 27 September 2024

Source: Bloomberg, JPMorgan

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