EM debt ends little changed after weak start; Saudi Arabia underperforms as OPEC meets

By Rebecca Melvin

New York, Dec. 6 – Emerging markets debt ended the session at around the neutral market after a weak story on Thursday. The session was a whipsaw one for U.S. stocks. Technology names clawed back in the final hour of trade after plummeting at the open, and the Dow Jones industrial average closed down only 79 points, or 0.3%, to 24,948 after being down nearly 800 points.

U.S. Treasury yields were lower and oil prices dropped.

“Pretty weak day across the board,” a London-based market source said, citing spreads between 5 basis points and 15 bps wider for most credits in the Central and Eastern Europe, Middle East and Africa region.

Saudi Arabia was a notable under-performer, the source said, as investors focused on whether the meeting of the Organization of Petroleum Exporting Countries plus Russia on Thursday would be able to find a way to support the price of oil, which has dropped sharply since October.

The price of oil fell 22% in November and was down again on Thursday amid speculation that OPEC’s actions will not be strong enough.

Spreads for Saudi Arabia bonds were wider across the curve by approximately 12 bps and 15 bps. The Saudi 4½% notes due 2046 were seen wider by 18.5 bps.

Saudi energy minister Khalid al-Falih said there had yet to be any agreement made regarding oil cuts. He said Russia needed to cooperate and a decision was likely by Friday evening.

Relations are strained within the OPEC. Qatar, which has long been part of the Gulf Cooperation Countries supportive of Saudi Arabia, said on Monday that it would leave the OPEC next year to focus on developing natural gas. The decision may have been motivated by frustration over the Saudi’s dominance of oil policy, according to reports.

Qatar’s spreads was an outperformer particularly on the long-end of the curve, and the spread on its nearest dated 6.55% note due 2019 actually narrowed by 1 bp, according to a London-based trader.

The spread on the Qatar 3.25% notes due 2026 was wider by 10 bps, but that of the Qatar 4.5% notes due 2028 and all paper longer than that were wider by single digits.

Egypt bond spreads were also notably wide. The spread on Egypt’s 5.75% notes due 2022 and its 5.577% notes due 2023 were both wider by 25.4 bps.

Meanwhile, Russia has inked an agreement with Venezuela to funnel $5 billion into the Latin American country in oil investment contracts. Crude oil production from Venezuela had been falling precipitously amid a breakdown in that country’s economic system. In October, Venezuela’s crude oil production plunged by another 40,000 barrels per day compared to September, and stood at 1.171 million bpd. That was half of the country’s 2016 output, and down from 1.911 million bpd for 2017. Delays in shipments of Venezuelan crude oil affected the countries two primary trading partners, Russia and China.

In the broader markets, the DJIA closed down 79 points, or 0.3%, to 24948, and the S&P 500 lost 0.2%. Both indexes are modestly higher for the year, after briefly sliding back into the red for 2018 earlier in the day.

Investors are now looking ahead to Friday’s session, when the U.S. Labor Department’s November payrolls report will be released. The labor market data is a closely watched indicator for the Federal Reserve officials in setting rates policy. A survey of economists expect employers added 198,000 jobs during November and unemployment held at 3.7%.

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