EM assets volatile amid global uncertainty, unrest; Abu Dhabi, Qatar, South Africa resilient

By Christine Van Dusen

Atlanta, Aug. 9 - The continued fall-out from the United States' ratings downgrade and new rioting in the United Kingdom - along with discouraging words from the Federal Reserve - made for a volatile Tuesday for emerging markets assets that featured wider spreads, choppy trading and no new issuance.

"It's been very active again today," a trader said. "Just trying to keep the head above water. Life vest and whistle needed still, as I'm sure volatility remains, going forward."

The Federal Reserve said it expects a slower rate of recovery during coming quarters and will hold interest rates at low levels until at least the middle of 2013, a move that market-watchers took to mean that the country's economic outlook is negative.

Investors, for the most part, sat on the sidelines amid all the pessimism and chaos, a London-based trader said.

"It's a tough old market and world out there," he said. "The market tried to rally and improve bids first thing, and we had a 30- to 45-minute pop before good selling came in and forced us lower."

Said another trader: "The markets are under pressure again. High betas are getting smoked. Liquidity dries up into the close as local bids again disappear and as London dealers try to get home safely."

The JPMorgan Emerging Markets Bond Index Plus spread started the day at Treasuries plus 331 basis points, 34 bps wider, with most sovereigns up 20 to 40 bps and Venezuela 100 bps wider.

"A Singapore holiday today has further contributed to illiquid market conditions, with price action very choppy," according to a report from RBC Capital Markets.

Day starts with a bounce

Most sukuk issues opened on Tuesday unchanged, price-wise, a trader said. But there were some gains from Middle Eastern issues.

"We've been due a bounce," he said. "Let's see how long it lasts. As I've said there are worse places to stick some cash than solid blue chip credits in Qatar, Abu Dhabi and Saudi Arabia. Keep an eye on oil though, which is now sub-80."

Bonds that were holding well early on Tuesday included the Abu Dhabi sovereign, International Petroleum Investment Co.'s 2015s and 2016s, Mubadala's 2014s and Abu Dhabi National Energy Co.'s 2017s, 2018s and 2019s. First Gulf Bank's 2016s opened at 100.37 bid, 100.75 offered, two bps tighter.

The Dubai sovereign's 2020 bonds were up at 108.125 and Dubai Water and Electricity Authority's 2020s were up at 104.87 while its 2016s were 105 bid.

"Emirates' 2016 dollar notes are off the lows, now at 98.75 bid," a trader said.

Bounce doesn't last

But the bounce was short-lived, he said later in the trading day.

"After an initial attempt to rally, we have just had another major re-pricing lower," he said. "We are only seeing ad hoc client selling, but dealers have gone to the screens and everything is lower."

Names like Russia's Vimpelcom were getting hit the worst, he said. The company's 2022s were trading Tuesday at 92 to 93 after the previous day's level of 97.

The Russia sovereign's 2020s and Sberbank were about 15 bps wider while names like Gazprombank were 50 bps wider.

"In the corporates, it's the memory of the crisis that haunts people, so the Vimpelcom curve is the worst hit, down 4 points at one point," he said.

BTA, Evraz trade down

In other trading, the 2018s from Kazakhstan-based BTA Bank were seen at 72 offered on Tuesday after trading at 80 on Monday. And Russia-based Evraz Group's 2018s, which were at 98 on Monday, were trading at between 93 and 94 on Tuesday.

Egypt's 2020s were holding well with local demand, trading a few times at 101, while some sellers were seen for Lebanon and buyers for Dolphin Energy Co. And Qatar's Qtel International's 2025 notes were holding, trading at 97 on the bid side.

"For the most part, the Middle East and North Africa are behaving relatively well and there was, once again, some regional demand on certain bonds, seeing them massively outperform their peer group," a trader said.

Said another trader: "Solid blue-chip names in the region are in a better place going forward than many other parts of the world. However, they are still obviously hostage to global risk appetite. I'm still looking to trade around the market and sell into upticks on longs I've picked up in the panic."

South Africa a stand-out

Also on Tuesday, South Africa's performance was impressive. "South Africa is still the major outperformer, with the whole sovereign curve only 25 bps wider through all the chaos," the London trader said.

Meanwhile, Ukraine corporates were falling apart, he said.

"It's incredible how the corporate market here can just implode," another trader said.

The sovereign's 2021 notes were a point lower at 100.40 while corporate names were down 3 to 5 points.

Looking to Turkey, the sovereign curve saw some activity while things were fairly quiet on the corporate side.

"However, some trades are going through," he said.

© 2015 Prospect News.
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