EM Fixed Income: Navigating some sudden market turbulence

Anezka Christovova (0:03)

Hello, and welcome to our At Any Rate, Emerging Markets Focus Podcast, a place where students discuss recent developments and key issues of focus in the emerging market fixed income as a class.

I'm Anezka Christovova, head of EMEA, EM, and last time, Local Market Strategy here at JPMorgan. And I'm joined by Ben Ramsey, head of EM Sovereign Credit Strategy, and Vaim Hong, head of EM Corporate Credit Strategy, both at JPMorgan. Ben, Vaim, thanks for joining.

Ben Ramsey (0:31)

Anezka, thanks, nice to be here.

YM Hong (0:33)

Thanks, pleasure on my side.

Anezka Christovova (0:36)

Has been a rather difficult week in markets, particularly for EM Local Markets. When we look at our price action, certainly our benchmark, GPIM Local Markets Index has taken a hit. We've reached peak performance towards the end of August. Since then, we are down about 2.0, over 2 percent. We're still up on the year, but we've given back more than half of the performance that we had up to end of August. Certainly, EMFX has now contributed to that. Before that, EMFX was the more resilient part of the asset class. But since end of August, it has also started to show some bubbles. One thing I would highlight to start us off in the discussion today, if we look at the month performance year to date, and I'll zoom in on the very recent performance in a second. If we look month to date, EM has been a by-product of the external pressures. So in EMFX, certainly, we have suffered some downsides. But actually, most currencies month to date managed to outperform the euro.

Similarly, in rates, when we look at month to date performance, rates markets have been selling off, but the sell-off was led by US yields across different tenors. That changed late this week when we look at a price action in a very, very narrow window starting yesterday.

EMFX underperformed the euro and some of the rates market sales were larger than in the US. We saw a little bit more vulnerability come through in the last few days. With that, it has indeed been a difficult week, particularly for local markets.

Ben Ramsey (2:43)

Let's pick up on that, Anezka, in light of this price action, where do you think these pressures are coming from? It seems this week, the potential US diesel export ban has become a key driver for markets.

Would you agree? And how significant is that risk for your markets?

Anezka Christovova (3:01)

Right. So some of these pressures that markets are reflecting have been in play for some time.

We have been talking here of a reflationary backdrop. So strong growth, strong inflation, which in general has been a key driver of some of the rates fell off.

What we have seen come through a bit more this week has been a little bit more signals in the data of US strength compared to the rest of the world. Certainly some of the data have suggested that. So that is always a little bit more difficult point for emerging markets when you have to compete with the US performance in growth specifically. And then the diesel ban certainly has created an additional source of risk premia. I would say this has played a large role in the recent price action. I would say that without that we would have not nearly performed as poorly as we did.

Now, why does it matter? So we have for a long time looked at oil prices and said, look, oil prices are high, but in real terms, they are not a constraint on growth. They add to inflation, but they are not very large in real terms to really endanger the growth outlook. Now for product prices, the price action has been a lot more problematic. In real terms, product prices show a lot more pressures than outright crude. And the diesel ban is important because several of EM countries rely on US imports. Now, our commodity analysts have published, and I would refer our listeners to look into their publications in more detail, but certainly some of the statistics show which EM markets are a little bit more vulnerable than others. So we know that some countries, particularly in Lhasa, are a bit more reliant on US imports of diesel in their total consumption. So for instance, in the statistics, Chile and Peru look to have a larger reliance. I would also move a little bit away from the direct effect of who imports necessarily from the US, but rather who is vulnerable in general. Because if there is restrictions on US exports, it would affect the broad product market. It wouldn't be just for the countries that import from the United States. So here we certainly see some differentiation across the space, and I think some of those vulnerabilities have played out this week. So when we look at countries that import more refined products and their overall energy imports, the countries that stand out in the statistics with larger shares are Chile, South Africa, Philippines, Mexico. And I think we've seen some of that play out into this week's price action.