Morning Commentary: Surprise Brexit decision hurts risk sentiment; EM moves wider

By Christine Van Dusen

Atlanta, June 24 – Emerging markets credit default swaps spreads were substantially weaker and credit was wider on light volume Friday morning on the news that the United Kingdom voted to leave the European Union.

“Following the results of the referendum, markets are naturally in a risk-off mode,” a London-based strategist said. “Generally, we expect [most of EM] to remain fairly insulated, but the surprise outcome does affect overall sentiment.”

Said a trader: “Lots of uncertainty, so we’re seeing the usual flight to quality.”

However, given that emerging markets bonds were performing well before the Brexit vote, many bonds seemed rich, the strategist said.

“From an investors’ standpoint, today’s event could result in buying opportunities once the dust settles down,” he said.

The stabilizing trend for oil prices is helping EM bonds, he said.

“We expect low rates to remain for longer,” he said. “Needless to say, much will likely depend on central bank actions and political reassurances to calm down markets in the foreseeable period.”

Latin American bonds on Friday morning gave back the previous day’s gains – and then some, a New York-based trader said.

“Performance is also bond- or curve-specific,” he said. “Inquiry and volumes are light overall, with dealers tiptoeing around the Street here and there as they do price discovery.”

Mexico-based Cemex SAB de CV moved lower, returning to levels seen late last week and before, he said.

“No distinct movement either way, in terms of client inquiry; it’s been pretty even and light,” he said.

From Turkey, credit default swaps spreads widened about 52 bps on Friday morning, a London-based trader said.

“The cash curve moves lock-step, but actual flow seen was Street rather than clients,” he said. “In fact, given the move in United States Treasuries, the cash price moves were rather limited.”

Long-dated bonds from Turkey moved 3 points while bonds from the belly of the curve moved about 1½ points.

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