Citi‘s Most Read – FICC

Research evidence excerpt

Citi‘s Most Read – FICC

EM Credit Weekly - Still engaged despite resurface in geopolitical volatility

We remain engaged on EM credit despite elevated geopolitical noise and tight

valuations. While tensions in the Middle East continue to drive volatility across

energy and rates markets, we believe the broader macro backdrop remains

supportive. Our base case is that oil prices should gradually moderate as long as

supply disruptions remain limited, while softer U.S. inflation and a cooling labor

market should allow the Fed to adopt a less restrictive stance over time. Recent

inflation pressures have been driven more by refined product bottlenecks than by

crude oil itself, reinforcing our view that the current energy shock is unlikely to

generate a sustained inflation cycle. Against this backdrop, we continue to favor

earnings carry and view periods of spread widening as opportunities to add

exposure rather than reasons to turn defensive.

Donato Guarino | Alexander Rozhetskin | Luis E Costa, CFA | Nikola Apostolov

Oil Prices bounced back

US/Barr (%)

120 2.6

110 2.5

2.4

2.3

2.2

2.1 60

50 2

7/24/2023 7/24/2024 7/24/2025

Oil US 5y5y Inflation Break-even (RHS)

CEEMEA Foreign Exchange and Rates - Local Markets Scanner: July

While we saw a strong rally in late-June owing to the MoU trade and re-positioning

back into EM carry trades, some of the positioning in popular EM trades is now

starting to hurt as MoU price action in energy complex is starting to see reversal in

light of renewed US-Iran strikes. This has hurt popular EM trades with crowded

positioning such as Hungary and Egypt the most in our region, even as oil price

action has been somewhat more muted than expected. We do expect an eventual

resolution on SoH, but the path will remain volatile.

Bhumika Gupta