EM assets have cheapened significantly but risks remain to the downside as spillover risks are growing. We stay bearish on EM credit and neutral on FX/local duration. Please note our expanded Africa coverage.

FX & EM Strategy: We discuss whether central bank sanctions will cause diversification of reserve assets and conclude that USD, as the safest global reserve asset, is likely to stay dominant, but somewhat less so than in the past.

Meanwhile, the risks are to the downside for EM assets on the spillover from commodity prices, USD funding stress and the Fed's imminent hiking cycle.

Sovereign Credit Strategy: The index is now down 11% year-to-date and spreads have widened faster than even during February 2020 to now look cheap both outright and versus US credit. We think that spreads are in overshoot territory and will end tighter by year-end yet for now stick with our bearish view, (again) resisting the temptation to add risk. This week we focus on African sovereigns, which we recently expanded coverage on, and the spillover from Russia/Ukraine.

Trade linkages are limited with exceptions in Egypt and Senegal through their wheat imports. The commodity channel, via oil and precious metals, should see Angola, Nigeria, Ghana and South Africa benefit from a terms of trade perspective. Within the spectrum of African sovereigns, we like Nigeria (debt dynamics) and dislike Ghana (fiscal uncertainty).

LatAm Macro Strategy: We review LatAm's exposure to higher oil prices, risk sentiment and investor positioning and take into account domestic narratives and risks. We keep our 1y TIIE payer, 10y COPxIBR payer, 1s5s COPxIBR flattener, UW PeruGB 24s versus OW PeruGB 32s and long CLP/MXN trades. We close our short USD/PEN 3m NDF and our short Chile 10y breakeven trades.