EM Fixed Income: Battle tested, but shields still up

0:00Hello and welcome to our at any rate emerging markets focus broadcast a place for us to discuss recent developments and the issues of focus in the emerging market fixing come as a class. Amanech Kastova head of Emia E. M. Rautam, welcome market strategy here JP Morgan and I'm joined by Ben Ramsey head of E. M. sovereign strategy and Tanya Jacob senior, a lot of effect strategies both at JP Morgan. Ben, thank you. Thanks for joining. Thank you, Nesca. Thanks, and Nesca nice to be here. To me, I have all prices through the threshold of $100 per barrel. US yields are reaching new year to day highs and the fact is now clearly in way depending on the next CPI print. We are forecasting the fact to high key then September or December. The base case is that US or CPI prints just a touch above 0.2 month to month tomorrow which would be

1:05consistent with a December hike but obviously here a print slightly above and it could be easily speaking about September and obviously markets are reprising the probability and we speak. Now that has been a fairly challenging backdrop but against that EM has actually not felt that badly. We have a DXY down over 2% since the start of July and EMFX is about is up about 2% in spot terms over the same period and over 3.5% in total return terms. What we both have not performed well but with the help of FX and higher yields the GBIEM local markets index is up on the year. So yeah in total it's not been that bad. I would also mention that the numbers here that the digest quotes it they for instance don't include Korean

2:06bond which has seen very large FX gains in recent weeks. In the end, sovereign and corporate credit we have held about flat over the summer and still up on the year in total return terms. So overall EM has dealt with the external pressures reasonably well. In this spot card we will review whether EM can still perform into the final quarter of the year and we will also focus on the various more idiosyncratic stories. So in Escalam, let me turn that back to you. EM local markets have been overall resilient but as you said mainly thanks to FX. Would you say that these trends can persist or rather is that a performance we've seen over the summer does that make local markets feel a little bit more vulnerable to a correction? Right so let me start the scene a little more with a bit more detail on EM FX. So I think it is actually quite remarkable that over the past month in total return terms only two currencies have

3:11delivered negative returns, the Chilean peso and Philippine peso. Even over the past five days when these pressures have accelerated we have a good third to half of the space delivering positively which is really remarkable. Now in the short term I would say there's certainly risks. The reprise of rates is getting to a point where we could see EM FX take a bit more notice. So let me break that down I think what matters is both the jumping yields as well as the volatility of the move. When we think about the repricing of the Fed it's been quite sharp. On the day we are speaking here over 10 basis points for how much is priced for the Fed Hikes. As a rule of thumb for the level of yields the lower yield there's a more sensitive. So in each region we have some more vulnerable currencies to the outright level of yields for the US. So let's

4:15say in Lata that would be Chilean peso if the lower yield in EM would be check over the central bank is still cutting and obviously some lower yielding parts of Asia are also vulnerable. Now then there's the second point which is the volatility of the move. So the volatility of the move is a lot more important for Kyrgyz strategies. It's actually quite interesting that the repricing of rates globally has not been particularly volatile measures of rates volatility at quite low and that has kept Kary performed in EM. We can see bouts of little volatility when the moves happen a bit faster than EM Kary takes a notice but probably speaking the repricing has not been protected all the time. But to kind of sum it up in the short term we could see some issues with with the repricing of rates especially in the US. However what we have been emphasizing and I think it remains important is that the repricing is quite synchronized globally because it's

5:15driven by a synchronized global cyclical uplift and synchronized global inflation repressures. And I think for the ethics market which is a relative asset class that that makes the most difference and I think that's why ultimately EMFX it will obviously react to the points of fast repricing but structure it's I think in a in a in a good way as long as the cyclical algorithm remains supportive. I would also say that we continue to see on our metrics relatively moderate positioning in some cases even wall positioning. So there are few pockets of higher positioning which is in frontiers and the very high yielders Lira Brazil but actually in most currencies the positioning scores are quite moderate to low and even very low for instance in the case of Asia. But I know thing I would hear make is that our FX view assumes that EM central banks would be reacting in a synchronized fashion just like DM central banks are reacting but so far we have not

6:20seen that many hawkish shifts outside Asia and that is a risk to the view. One of the questions we received most often is whether at first we need to see FX weakness in EM for the central banks to shift hawkish. My own view is that we are in a slightly different environment on that. That was that was the case in recent years where most EM hiking cycles have been defensive. I would say right now because global growth is holding up we should brush out more on the kind of frameworks that we use to use and that is more halo rules where central banks react more in a traditional way to output gaps and inflation and I think that that is a bit more the environment that we are heading into. I've been speaking about FX which has been the outperforming asset class and obviously that is where I think the risks are whether that makes it more vulnerable to

7:23a short term style of for rates the performance has not been particularly great that has been very correlated asset class with the global rates pressures. We certainly are kind of keeping a cautious high on rates not being particularly directionally involved but we rather prefer here is looking at RVs, idiosyncratic stories. Generally even the cell of enrates is very fast. It is hard to chase it but certainly the underlying backdrop is cautious for rates. Okay so let me bring us back we will circle back from Taylor rules and think about maybe how central banks think about supply shocks and here of course we have the energy story. As we speak as we record this, Brent Crude is well back above 100 again. If we look at gasoline

8:24prices they never really went down after the initial shock of the event conflict and now they're back we're making new highs and we look at gasoline and gasoline futures in the US. Let's look at let me ask you about closer to home for you and as a European gas prices those have certainly become a focused lately. Could could they or the broader theme here be caused for more substantive pressure on local markets? So European gas prices have been very much in focus for us here in this region. It comes back to the very difficult period that our markets experience at the end of 2021 and through 2022 when gas prices here in Europe really spike to extreme levels and we saw multiple false effects on C, FX, rates markets and even broader impact.

9:26So at this moment European gas prices are starting to exceed 80 euro per megawatt hour so some of these frameworks are all coming back into focus. Now for us actually I would say that there is one key difference and that is that the risk for very explosive price action in gas prices seems more limited this time round. The European gas market is a lot more connected to global markets via LNG infrastructure than it was in 2022. There is a lot more co-storage globally. So what we are hearing from our gas analysts is that actually the upside risks are not nearly as high as in the 2021-2022 period. Having said that gas prices have certainly increased so we need to be thinking through the impact on inflation, growth, balance of payments and we are starting to see some of

10:30these effects. Now from my perspective because gas prices enter inflation usually via regulated prices so I think the inflation risk is some but perhaps not very large but we are rather focused on the balance of payments risks where you simply have to import gas at higher prices and therefore your balance of payments will deteriorate. We both see some deterioration in the balance of payments but the starting point has been not particularly bad actually quite good in some cases about basic balances where in surplus before this either shock. So there is some risk but we would say contained and the most interesting thing I would say is that on our past work when we asked the relationships balance of payments does not have very consistent predictable relationship for exchange rates. It actually has very consistent relationship in this region to interest rates. So although the main risk runs through the balance of payments the most consistent relationship

11:33is not a yield rather than thicker effects. Now with that let's turn to credit markets and for you Ben I have a very similar question what are the risks here that you worry about the most and how are technicals and positioning looking for credit? Are you seeing any signals from September issuing so far any of these technicals stand out? So for credit and we've been in a market where we've been really range bound in terms of spreads if we look at the MB global diversified our main sovereign benchmark speaking to an investor recently he said we've been going aggressively sideways for three to four months and I think that that's an interesting way to characterize it. We've been kind of chopping around and that's frustrating in terms of you know certainly when investors are trying to take views one way or the other.

12:36I mean I think the risk you know this sideways trend is following what's been sort of like a very prolonged period of spread tightening to historic types which we saw after the deliberation day of April 2025 and it's you know it's been this environment basically where we stopped spreads going down as yield as core rates were moving out for the reasons we've been discussing. So we've had all in yields move higher and that's I think kept an interest in terms of investors despite what would be you know unattractive credits spreads overall. I think the risk that I would feel is like to be get out of a little bit this sort of benign range where yields are high enough but not so high that they're threatening financing costs that they're going to be threatening debt dynamics especially for lower rated sovereigns which we need to issue at you know the higher yields obviously.

13:37I think I would be worried you know I'm less worried at the moment I mean at the end of the day I'm worried in terms of spreads if we have recession re-risk pre-back into the table that's that's the the trigger that we really send credit spreads potentially significantly wider. Not necessarily technical pressure we've been discussing the technical pressure potentially from the high-prescaler issues issuance in India markets but really recession risk and that seems to be not on the table the resilience of the global economy has been remarkable this year. So I think I'd be a little bit more worried that basically this this sort of strong inflationary environment continues to push core rates higher continues to lead to a steepening of the treasury curve that we end up with a Fed that ends up doing more than what the market's pricing in that ultimately just have sort of ongoing higher steeper core rates which is going to at some point put more credit

14:38risk in and it's at some point going to push up the yields at which sort of our single-be credit issuers would be looking to refinance in the market up to levels that would be too high and could start to shut some of those summers out and I think that that that that would be the dynamic that would worry me and then and I think ultimately you know we would be worried about sort of the that end cycle dynamic then turning the page to a recession later on. So I mean I think it's still an elusive narrative it's still one which looks like it's going to take time to play out and I mentioned technical pressure potentially from hyper-scalers in terms of the technical picture that we're seeing in the end I think it's one which is still really quite supportive we've had an under allocated asset class for quite some time we now have you know a second year of inflows and basically you know overall for you and we've already outpaced 2025 so far year to date

15:38hard currency inflows are not quite that that speed but are coming in quite strong issuance has been you know even though summers are needed to internalize and validate higher yields we've had a very active and summers start to to September in terms of the issuance calendar and it looks like we're going to be you know pushing ahead of potentially you know the the issuance you know high water mark that we reached last year by the by the time we get to the end of the year so I think over on the technical side it's not something where we're seeing at the time being something which is is worrying us too much. Right and I also wanted to update from you on another idiosyncratic topic last week we talked on the podcast about Senegal restructuring and there's another restructuring that is also called the watch that's Venezuela

16:38so what is the update there what is the latest in that story? Yeah I wish I could give you something more concrete I mean we had been sitting in watching and waiting Senegal for as you mentioned for a long time and it finally we got some announcements that they were going to take action I think we still have a lot of uncertainty but what that action may be on the van his way to the side we're still sort of sitting and waiting for those announcements the last sort of official comments we had in terms of guidance was back in the middle of July almost two months ago now when the the economic authorities of the country said that despite the earthquake which took place at the tail end of June that debt restructuring was still a priority and that they can intended to move ahead ahead with this you'll recall the van his way is preparing its restructuring without the IMF so this isn't quite on orthodox setup they're working with their own financial advisors they've obviously been working very closely in

17:42a bilateral relationship which is also unique and on orthodox one with the United States so you know we don't have sort of the typical road map that we would have in the typical IMF led restructuring we don't have data then as well as only recently started to produce some of its MAC record on a macroeconomic data after you know nearly nearly ten years of of a almost producing nothing and we don't have fiscal data most importantly as we want to try to think about you know debt sustainability analysis so we expect the authorities and their advisors to produce a more robust set of data a more robust macro framework around which they will base a debt sustainability analysis we have had important announcements over the last month and weeks in terms of advancements in the oil sector the US playing a prominent role there again

18:46not really following typical blueprints that we've seen in the past so I think we and investors that are looking at this closely are trying to wrap their head around what these announcements will mean for future production on the oil side and under what time horizon those forecasts are critical at the end of the day for thinking about the path of GDP and how basically the health of public finances and how much Venezuela will have at the end of the day in order to sustainably service that going forward so you know we're getting elements we're we're we're we're waiting and watching for more specific announcements at this point we you know can't do much more than that other than you know as as we do and as the market does we continue to try to you know talk to as many people and get as much color as we can to see the direction of travel here

19:54and let's bring you Tanya in at this moment thank you for joining us today and I was hoping we could discuss one of the key political events this year facing a more remarkable and that is Brazil's election which is now approaching very fast and we are seeing a lot of interest in this event would you be able to talk us through the latest developments and your views? hi Neshka of course thank you for inviting me it's always great to be here so yes Brazil and Assets are now in full election mode and as you said the biggest focus is of course on the polls in the past couple of weeks the gap between the leading candidates president Lula and Flabby Bolsonaro has narrowed in a number of major polls and the overall picture is now more aligned with the 50-50 percent probability scenarios with momentum shifting towards Bolsonaro after you know most of the polls had been given a small edge to president Lula since June and throughout the summer there's also been some talk about a potential third contender after a

20:59little known candidate called Augusto Curi raised in vote intention to around 10 percent of points in August but there's been really no momentum after that and the baseline is still for a two-horse race with a high probability of a second round that can be really decided by an inch now as we have been discussing in this conversations fiscal dynamics are the main source of concern when it comes to the market participants with the government deficit in Brazil at 9 percent and the debt to GDP ratios are on 80 percent so the messages and the fiscal choices made after these years general election will be the key drivers of sentiment in the months to come and I think it's interesting to point out how these perceptions for fiscal outlook have been shaping up and evolving ahead of the election with a relatively large number of investors at the moment thinking that the fiscal outlook is actually unlikely to deteriorate materially in the short term under either

22:01election outcome and this view aligned with the better polling of the opposition the momentum of Bolsonaro has resulted in some very positive performance in Brazilian local assets in the past couple and in a very striking decline in the demand for top-side protection for example in the dollar Brazil option space investors have instead been more focused on structures providing leverage to further downside extension which I think is a very interesting development in the past couple of weeks that has opened some opportunities in the option space and as per views I would say that at current levels of rates and effects there's not much risk premium acheteen and the risks into the election still look broadly symmetric for us the perceptions of what will be pursued regarding the government balances along the broader appetite for risk and all of the elements that you discussed at the beginning of this podcast will play a role in you know shaping the magnitude of

23:04the post-election moves but in principle we are looking at a plus minus six percent moves in dollar Brazil and plus minus a hundred basis points in rates depending on whether the outcome of the election seems consistent with more fiscal deterioration or consistent with consolidation efforts ahead so stay tuned because it will definitely be a very interesting month and a half ahead of us and definitely that that will be indeed a very interesting month and a half thank you Tanya and Ben and that brings us to the end of this JP Morgan at any rate emerging markets focused podcast thank you all for listening and we hope to have you back again with us for the next one this communication and it provided for information purposes only please refer to JP Morgan recent reports related to its content for more information including important disclosures 2020-thix JP Morgan Chasen Company all rights reserved this episode was recorded

24:06on the 10th of September 2026