EM Fixed Income: To every thing there is a season

What the desk is arguing

The desk frames its cautious outlook for EM fixed income as a response to the changing dynamics of the geopolitical landscape, particularly the blockade of the Strait of Hormuz. Per the full note from J.P. Morgan, the current phase of the conflict has led to a rally in risky assets, but valuations have become extended, necessitating a more neutral stance to navigate the uncertainty.

Supporting this view, the J.P. Morgan team highlights that the EM FX risk appetite index indicates increased positioning, yet the overall uncertainty surrounding the conflict and its economic implications warrants caution. The desk notes that while many currencies are trading stronger than pre-war levels, the potential for further volatility remains significant.

Where it sits in our coverage

Our current consensus target for EUR/USD stands at 1.1750, with a range of 1.1300 to 1.2000. Notably, firms like jpmorgan and ubs project targets of 1.1800 for Dec-26, while citi is more conservative at 1.1200.

This cautious view aligns with the broader consensus, as the desk's neutral stance reflects a balance between the upper and lower bounds of the current forecasts, particularly in light of the geopolitical risks at play.

How other firms see it

Aligned firms such as jpmorgan and ubs share a similar cautious outlook, while firms like citi take a more bearish stance. The divergence in views highlights the uncertainty surrounding the geopolitical landscape and its impact on EM assets.

Additionally, the trajectory of EUR/USD is closely linked to the decisions of central banks, particularly the Fed and the ECB, as they respond to the evolving inflation and growth risks in the current environment.