 EM reflation is the more lasting theme to position for rather than a global slowdown, with markets quick to move from an outlook of too hot to too cold.

 We stay UW local rates even as more hikes are priced in as we see it as the best risk-adjusted way to stay positioned for reflation and a shift higher in core rates, but we cut its size by adding an OW in Asia duration given regional dynamics.

Stay MW in EM FX, MW in EM sovereigns and OW in EM corporates.

Macro developments  The recent high-frequency data point to improving growth momentum in Latin America and EMEA EM. Latest developments puts the spotlight on EM Asia, but we expect the recovery to continue this quarter.

 The COVID-19 Delta variant remains a risk to our near-term EM growth as the pace of vaccine rollout has picked up in only a handful of EM countries.

 CPI inflation momentum remains elevated; headline to moderate but core to remain under upside pressure against the backdrop of a graduated broadening of EM CB hawkishness.

Top trading themes  EM local markets - FX: MW overall. EM FX looks balanced from current levels given near-term concerns around growth and COVID-19 variants, offset with a more supportive 2H EM backdrop of higher growth, improved terms of trade and higher carry from central bank tightening. We hold OWs in BRL, CZK, IDR and MXN against UWs in CLP, COP, PHP and RON. Outside of GBI-EM, we are bullish ILS and KZT.

 EM local markets - Rates: UW overall. We stay UW given EM central bank hawkishness and already extended moves lower in core yields but cut the size of the UW by moving Asia duration to OW. We are UW low-yielding bonds in CEE (Czech Republic, Poland) and Latam (Chile). In Asia, we shift OW duration via OW Indonesia and Thailand versus a smaller UW Malaysia, and hold payers in 5y TWD and KRW. Elsewhere, we hold longs in select high yielders (South Africa) and frontier markets (2y bonds in Egypt, Ghana, Ukraine).

 EM sovereigns: Stay MW EM sovereigns with an increasing bias to add on further spread widening. Hold a long commodity bias, favoring short-duration Asia and mid-yielding Africa.

 EM corporates: Stay OW and prefer HY vs IG, particularly commodity credits where we expect greater spread compression and total return potential. Asia HY valuations have improved but we stay neutral for now.