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
There was a sharp drop in risk markets this week, as President Donald Trump’s tariff agenda became a reality, and with it stagflation turned into a market base case. The S&P ended the week down -9%, with the Euro Stoxx 50 not far behind at -8.5%. Emerging market equities (EM) outperformed and fell -3%, although this was more of a timing issue as they have now begun to catch up to the downwards move in equity markets elsewhere. The US rates curve had a near parallel move, with 2-year yields 26 basis points (bps) lower in response to the extreme risk-off move in equity markets. Meanwhile, US real yields moved 8bps lower in the 10-year point to end the week at 1.80%.
In EM credit markets, spreads were 30bps wider and 38bps wider in corporates and sovereigns, respectively, while total returns were -0.3% for corporates and -0.9% for sovereigns. In EM corporates, outperformance came from the financials sector, while the telecommunications and transport sectors underperformed. In the sovereign space, lower-beta, investment-grade names outperformed, while the higher-beta names, such as Argentina, Egypt, Nigeria and Ukraine, all underperformed.
In EM local markets, total returns were +0.2%, with foreign exchange (FX) the main drag on returns but positive performance from rates more than making up for it. In terms of the regional performance, it was a similar situation everywhere, with rates performing well and compensating for weakness in FX, even in the higher-beta names.
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