Morning Commentary: EM perks up on oil prices, ECB stimulus; Turkish banks, Kazakhstan tighten

By Christine Van Dusen

Atlanta, Jan. 22 – Emerging markets assets got a boost on Friday morning after the European Central Bank’s stimulus plans pushed oil prices above $31 a barrel.

“After days of headaches in EM, investors all over the world must have decided that enough is enough,” a strategist said.

“The risk-on mode is supported by dovish comments by the ECB, with further easing considered possible later in time. Markets continue to look firm this morning.”

Oil producing nations seem to agree that “oil prices were irrationally low,” he said, and that the market can “expect a recovery later in the year.”

But some market-watchers think the oil rally won’t last long, and energy-focused economies will continue to suffer.

Nigeria, for one, is expected to widen its budget deficit for 2016 by 36% and could borrow $4.5 billion from the markets this year, one source said.

Investors were also eyeing Turkey, after a government official said that the “central bank is flexible and stands ready to take necessary steps at any time,” the strategist said.

Inflation is expected to remain a top concern for the sovereign this year. With this backdrop, banks are unlikely to issue new notes, another market source said.

But most banking names did see their bonds tighten on Friday morning, moving in as much as 20 basis points.

In other trading on Friday morning, many emerging markets bonds were in a “vice-like grip,” a trader said.

“If you were procrastinating about adding risk yesterday, you're kicking yourself this morning,” he said.

“The usual liquidity trap gets sprung on the way up, just as it does on the way down, as buyers are looking to add paper this morning.”

MENA sees bids

Looking at the Middle East and Africa, bonds that “you couldn't give away for love or money two days ago are almost bid-only,” another trader said. “Obviously the fallen heroes are back with the biggest spread moves.”

He pointed to names like Saudi Electricity Co., Bahrain and names from Africa.

Bonds from Kazakhstan were 25 bps to 30 bps tighter on Friday morning while DP World Ltd.’s 2037s moved in 37 bps.

“I suspect if we hold these gains the syndicate desks can finally sharpen their pencils early next week, but we still operate in a pretty fickle market,” the trader said. “That can change quickly.”

Overall, the trading environment for EM is “not great,” another trader said. “Best to hold your nerve and avoid getting topped and tailed.”

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