Emerging market debt (in USD terms) had a volatile and ultimately negative third quarter amid extreme volatility across markets, as seen even in core rates and G10 foreign exchange movements (see Figure 1). A more hawkish stance from the US Federal Open Market Committee (FOMC) in its September meeting contributed to a sell-off of major risk assets, as did surprisingly expansive fiscal plans presented by the new UK government which met an adverse reaction from the UK Gilt market — this resulted in some contagion across developed market rates and prompted the Bank of England to intervene.
Furthermore, fears of a halt to gas shipments from Russia to Europe through the Ukrainian pipeline also weighed on sentiment. Rising yields and a preference for ‘safe haven’ assets led to a strong US dollar, an outcome that has proven to be a dangerous mix for EM — there was significant FX weakening and an increased risk of default among frontier countries.
A tentative turn in EM hard currency flows in August proved short-lived, with September seeing -$7.0 billion of outflows. There were -$3.2 billion of outflows in EM local currency as investors took cognizance of the increasingly fragile outlook for vulnerable EMs due to the presence of a number of external shocks and idiosyncratic factors. This took year-to-date flows to -$36.3bn in HC and -$33.7bn in LC, according to JP Morgan.