Executive Summary
The hot CPI-plus-PPI combo pushed a September Fed hike to ~90% market implied probability; EM paid for it in duration, not credit. With the UST curve bear-flattening, all three EM sub-asset classes fell this week, but modestly. The quality-neutral sovereign selloff and steep duration gradient clearly read as a global duration repricing, not an EM fundamentals deterioration.
The tanker war took Brent near $110 per barrel and reshuffled leadership within EM credit toward idiosyncratic stories. With commercial shipping now a weapon, Saudi output cut, and $120–150 scenarios in mainstream research, prudent country selection is paramount.
Ahead of the FOMC/BoJ 36-hour sequence next week, local markets highlighted EM’s resilience with primary markets conspicuously open. Only a handful of local markets gained, yet issuers still placed $18.6 billion across 30 tranches, evidence that market access is holding even as the margin for error narrows with every leg higher in U.S. yields and oil.
Market Overview
Macro Update
The August CPI report, released Friday morning, kept the Fed on course for next week’s decision, with implied market probability of a rate hike jumping to nearly 90%, from around 70% prior to the release. Headline inflation held at 3.4% YoY with a 0.4% monthly increase, the fastest since January, as gasoline jumped 3.9% and accounted for more than a third of the monthly rise, with fuel oil up 10.1% on the month and 52% over the year. Core CPI eased to 2.4% YoY from 2.5% in July, though the 0.3% monthly core print ran hotter than expected. The release followed Thursday’s upside surprise in producer prices, which rose 5.4% YoY. From investors’ perspective, the war’s energy passthrough is now unmistakably in the U.S. inflation data, and the question for markets appears to have shifted from whether the Fed hikes next week to how far the tightening path extends.
The inflation impulse traces directly to the Middle East, where the conflict crossed a qualitative threshold. Over the weekend, the U.S. and Iran traded strikes on oil tankers and warships. Maritime intelligence firm Marisks noted that commercial tankers are now being “deliberately used as instruments of reciprocal economic pressure” and on Tuesday, the U.S. destroyed five Iranian crude tankers in retaliation for attempted attacks on an American warship. Iran vowed to strike energy infrastructure across the region, and Houthi attacks forced Saudi Arabia to temporarily halt operations at several energy facilities, driving a sharp decline in Saudi output.
President Trump said hostilities would likely run past the November midterm elections, with no significant gasoline relief before then, and advisers have reportedly told him the war could last the remainder of his term. If the market’s framework shifts back from pricing episodic flare-ups to pricing a prolonged conflict, the energy risk premium would carry direct consequences for inflation, rates, and EM oil importers and exporters.
Against this backdrop, Brent pushed close to $110 per barrel on Thursday, its highest since late May, before easing to around $105, finishing the week roughly 30% higher from its early-August lows. Sell-side scenario analysis is migrating higher. Goldman Sachs warned Brent could exceed $120 if Gulf output remains 4 million barrels per day below pre-war levels, and Bank of America flagged $150 in the event of major energy-infrastructure damage.
The bond market bore the full weight of inflation/Fed path repricing. The UST curve bear-flattened led by the front-end widening by as much as 25 bps versus last week, with the 10-year Treasury yield closing above 4.90% and the 30-year reaching 5.37%, its highest since 2007, before easing to around 5.32% into the close. Notably, the selloff proceeded even as the Treasury’s expanded long-end buyback program began operations this week, an early sign that official support is smoothing, not stopping, the term-premium adjustment.
Equities staged a rebound on Friday as oil prices eased from the Thursday jump and as Oracle’s stronger-than-expected cloud results after Thursday’s close offered the AI complex a bright spot. For investors, the long end near a multi-decade yield level is now the binding constraint on global risk assets and the test of whether AI earnings alone can hold up equity valuations is getting stricter by the week.
The ECB, meanwhile, abandoned ambiguity. Thursday’s unanimous 25 bps hike took the deposit rate to 2.50%, and President Lagarde called the decision “a no brainer,” while the statement’s warning that inflation is “set to remain well above target for an extended period” delivered a clear hawkish surprise; markets moved to price around 100 bps of additional tightening over one year, abandoning the “one-off energy response” interpretation. As the eurozone appears to be entering a tightening cycle, a higher ECB anchor could reset the valuation floor for CEE local rates and remove one of the last dovish anchors in the G10.
Currency markets told the same tightening story from Tokyo. The yen surged to a seven-month high near 153.5 per dollar on hawkish repricing of next Friday’s BoJ meeting, which convenes less than 36 hours after the FOMC concludes – a sequencing that could deliver back-to-back tightening surprises from the world’s two most systemically important central banks in the same week. The DXY was caught between Fed hike bets and yen strength, retaining its 99 handle, while gold slipped back below $4,400 per ounce as real yields climbed, and copper approached $15,000 per tonne on data center demand and tight supply. For investors, a strengthening yen driven by BoJ normalization, rather than intervention, is the more durable variety, and it tightens global liquidity at the margin just as dollar funding costs rise.
In EM, the week reinforced differentiation over beta. China’s August trade data emphatically validated the exporter-resilience thesis, with exports up 25% YoY, imports up 28.2%, and the trade surplus widening to $119 billion, even as the domestic economy awaits stimulus delivery. Canada’s retaliatory tariffs of up to 50% on roughly $20 billion of U.S. goods took effect Tuesday, with Washington threatening a ban on Bombardier jets in response, keeping the North American trade conflict live. In Latin America, Brazil’s Ibovespa posted its strongest close in four months on bank-led buying with the real steady near 5.11, as presidential election polls continued to trend in a market-friendly direction. Overall, EM assets are holding up impressively against a hostile rates backdrop, but the margin for error narrows with every leg higher in U.S. yields and oil.
The Week Ahead
The September 15-16 FOMC is the event of the quarter. With a 25 bps hike almost 90% priced after this week’s inflation data, the decision itself may matter less than its composition. The size of any dissent, the updated projections, and whether Chair Warsh, in his first potential hike as Chair, frames the move as insurance against energy passthrough or the start of a genuine tightening campaign. Less than 36 hours later, the Bank of Japan decides with the yen at seven-month highs and markets primed for normalization. A hawkish surprise from Tokyo on the heels of a Fed hike would deliver the sharpest one-week global tightening impulse of the cycle, with quadruple witching on Friday amplifying the scope for volatility. U.S. August retail sales and China’s activity data (Tuesday) will show how both consumers are absorbing the energy shock.
Geopolitically, the tanker war is the barometer. Whether strikes on commercial shipping and Saudi infrastructure intensify and how quickly Saudi output is restored will determine if crude consolidates above $100 or extends toward the $120 scenarios now in mainstream research. President Trump’s midterm-driven timeline suggests little appetite in Washington for de-escalation, while President Xi’s expected visit later this month carries the unresolved secondary-sanctions question for Chinese entities still trading Iranian oil. For investors, the FOMC-BoJ sequence, the oil tape, and the long end of the Treasury curve form a single interconnected narrative next week. EM markets, having weathered the repricing so far on carry and differentiation, face a stress test if all three tighten at once.
Highlights
Senegal announces debt treatment alongside IMF staff-level agreement
Event: On September 1, IMF staff and Senegalese authorities reached a staff-level agreement on a 36-month Extended Credit Facility of approximately $2.2 billion (475% of quota) covering 2026-29, contingent on IMF Executive Board approval, financing assurances from development partners, and corrective measures related to the 2024 misreporting case. Concurrently, the Ministry of Economy and Finance announced its intention to seek debt treatment through an enhanced G20 Common Framework, with CFA-denominated domestic debt explicitly excluded from the restructuring perimeter and Dakar pledging to continue servicing external obligations (including the September 13 Eurobond coupon), distinguishing Senegal’s approach from Zambia, Ghana, and Ethiopia. Senegal bonds dipped slightly but stabilized quickly amid light technicals and announced payment of the September 13 Eurobond coupon.
Investment Implications: The parallel IMF agreement and debt treatment framework represent a meaningful evolution in the authorities’ approach after two years of program suspension, providing an official-sector anchor and clarifying process direction that should ultimately support macroeconomic stabilization and eventual market re-access. That said, near-term execution risks remain material. IMF Board approval, financing assurances, corrective action on misreporting, budget amendments, and continued political tensions between the Faye and Sonko camps all sit ahead of substantive creditor engagement, and the enhanced Common Framework itself remains untested at scale. The explicit exclusion of CFA-denominated debt from the perimeter concentrates the adjustment burden on external creditors, and with 2028 Eurobonds now trading in the 50-55 cents range, current levels appear to price a relatively favorable outcome relative to recent African restructuring precedents. Near-term catalysts are IMF Board timing, the announcement of a creditor committee structure, and the government’s revised budget submission, which will provide the first quantified read on the adjustment path underpinning the debt sustainability analysis.
Lula’s lead erodes three weeks ahead of Brazil’s presidential election first round
Event: Eurasia Group lowered President Lula’s reelection odds from 60% to 55%, citing a strong campaign start by Senator Flávio Bolsonaro and a deteriorating approval trajectory for the incumbent. After holding an average 3-4-point lead from June through most of August, Lula’s advantage has evaporated. Globo/Quest showed the two tied at 41% in a runoff on September 7, BTG/Nexus put Bolsonaro ahead 46%-45% the following day, and PoderData/Aya (September 6–9) had Bolsonaro up 47%-45%. Meanwhile, Lula’s approval has fallen from a June peak of 47% to roughly 43.5%-44% amid an ongoing new corruption scandal centered on the Federal Supreme Court (STF) that has overshadowed the presidential campaigns.
Investment Implications: The main market focus in Brazil’s increasingly tight presidential election is the expected fiscal trajectory under the next administration and the perceived odds of a credible fiscal anchor. From that perspective, a potential Bolsonaro victory would be seen as a considerable improvement relative to the status quo, which we expect to support a significant post-election rally. This view reflects increasingly constructive signals that appear to be emerging from Bolsonaro’s economic team in terms of reform plans. An ambitious fiscal adjustment to the tune of 1.5% of GDP anchored by a constitutional spending rule and front-loaded spending cuts, among others. However, securing the presidency remains a daunting challenge for the Bolsonaro camp as Lula retains meaningful incumbency tools and the PT, Lula’s party, has not yet fully deployed its negative campaign against Bolsonaro. Meanwhile, a path for a third candidate – Romeu Zema, Renan Santos, Ronaldo Caiado or, most notably, Augusto Cury – has also emerged, but a scenario different from a Lula vs. Bolsonaro runoff on October 25 remains a low probability, in our view. In the remaining weeks until the first round on October 4, we see scope for continued spread compression and BRL strength on further poll tightening in Bolsonaro’s favor but would caution against market complacency in what has now become a toss-up election with likely binary implications for Brazil’s economic trajectory and asset performance.
Market Data
EM Credit Update
EM fixed income fell across all three sub-asset classes this week, with losses deeper than the prior week. Hard currency sovereigns returned -0.80%, local currency sovereign debt -0.50% and EM corporates -0.37%. Rates remained the dominant driver, and the duration gradient steepened in both hard currency indices: in the EMBIGD, 1-3 year paper returned -0.35% against -1.17% for 10+ year maturities, with a similar progression in corporates (-0.07% versus -0.74%). The credit signal differed by asset class. In sovereigns the selloff was essentially quality-neutral, investment grade (-0.81%) and high yield (-0.79%) finishing within 2bps of one another, whereas in corporates investment grade (-0.49%) again lagged high yield (-0.20%) by a wide margin. Taken together, the week reads as a broad repricing of global duration rather than a deterioration in EM credit fundamentals, though the scale of the move left few markets untouched.
Local currency sovereign debt returned -0.50%, with dispersion again wide, but the balance tilted decisively to the downside and only a handful of markets finishing higher. Colombia (+1.14%) led, carried almost entirely by the peso (+1.24%) against a negative price leg (-0.30%), followed by Indonesia (+0.89%) and Brazil (+0.81%), where a positive price return (+0.53%) and a firmer real (+0.22%) extended the prior week’s rally. Malaysia (-1.80%) was the weakest market, the loss concentrated in price (-1.18%) alongside a softer ringgit (-0.59%), followed by South Africa (-1.51%), where the rand (-0.98%) and local bonds (-0.71%) both detracted, and Hungary (-1.01%), which saw the same combination (FX -0.61%, price -0.50%).
Hard currency sovereign bonds returned -0.80%, with investment grade (-0.81%) and high yield (-0.79%) essentially indistinguishable. Latin America (-0.95%) was the clear regional laggard, while Africa (-0.68%), the Middle East (-0.70%) and Asia (-0.70%) held up marginally better and Europe (-0.74%) sat in between. Country-level performance was overwhelmingly negative, with only four markets in positive territory. Senegal (+2.42%) rebounded sharply to lead the index by a wide margin, recovering from the record lows reached at the start of the month when Dakar paired a $2.2 billion IMF staff-level agreement with a commitment to seek debt treatment under the G20’s Common Framework. Sentiment improved as the authorities confirmed they would keep servicing their obligations, initiating the transfer for the September 13 coupon on the 2048 dollar bond rather than suspending payments as Zambia, Ghana and Ethiopia did while negotiating. Cameroon (+0.45%), Mozambique (+0.34%) and Iraq (+0.11%) were the only other gainers. Venezuela (-2.16%) reversed course to become the weakest market after several weeks of leadership, giving back part of a rally that had carried defaulted sovereign notes to a near four-month high on the U.S. administration’s oil agreement and Chevron’s $7 billion investment plan, with attention turning to likely recovery values in a restructuring that could exceed $200 billion. Ukraine (-1.80%) fell as a renewed U.S. peace push failed to deliver a breakthrough. Envoys Steve Witkoff and Jared Kushner met President Putin in Moscow before travelling on to Kyiv, but the three-day pause in strikes observed during the visit collapsed immediately afterwards. Ecuador (-1.71%), Kenya (-1.22%), Peru (-1.17%), Mexico (-1.14%) and Uruguay (-1.12%) also lagged.
EM corporates returned -0.37%, holding up better than sovereigns, with investment grade (-0.49%) underperforming high yield (-0.20%) and the same duration progression in evidence: the 1-3 year bucket was close to flat at -0.07% against -0.74% for 10+ year maturities. Regional dispersion was narrow, with the Middle East (-0.31%) leading and Asia (-0.42%) lagging. Ghana (+0.78%) led at the country level and Ukraine (-1.60%) was again the weakest market by a clear margin, extending the prior week’s underperformance and tracking the sovereign’s reaction to the stalled peace process.
Primary market activity remained robust, with 22 issuers pricing approximately $18.6 billion of hard currency supply across 30 tranches, a similar total to the prior week but with a markedly different composition. CEEMEA accounted for roughly 57% of volume, with Latin America (24%) returning to the market after a week’s absence and Asia contributing 19%. Corporates rather than banks dominated, and investment grade made up about two thirds of supply. Teva Pharmaceutical was by far the largest borrower, raising approximately $4.9 billion across five tranches split between dollars and euros. DP World followed with roughly $1.6 billion. Jamaica brought the week’s only sovereign deal, a $1 billion long-dated issue at 6.25%. Latin American corporate supply was heavy, including YPF, MercadoLibre, Cox Mexico and Tecpetrol. African borrowers returned with Dangote Refinery ($750 million at 8.375%) and Tharisa ($300 million at a yield of 11.46%), the highest-yielding print of the week. Bank supply was lighter than the prior week and skewed toward senior and covered paper.
Fixed Income
Equities
Commodities
Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of September 11, 2026 (mid-day).
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of September 11, 2026.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
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