Argentina still underperforming; selling hits broader EM market as focus shifts to Fed

By Rebecca Melvin

New York, June 12 – Argentina’s bonds were underperforming again on Tuesday as selling hit emerging markets bonds in general.

Argentina credit default swaps widened by some 20 basis points to 375 bps even as the peso tightened. Investors watched headlines about worker strikes starting in that country, and the Argentine central bank decided to stand pat on rates at 40% after a policy-setting meeting, market sources said.

The central bank already lifted rates by 600 bps to 40% in early May with the aim of staving off a plummet in the peso.

Meanwhile other emerging markets credits sold off. Brazil and the Central and Emerging Europe, Middle East and Africa regions were also weaker earlier during a risk-off day ahead of wrap up of the U.S. Federal Open Market Committee’s two-day policy meeting on Wednesday and amid anxiety about whether it would hike rates again or not.

“If there were only two rate hikes this year instead of four that would reduce the pressure [on emerging markets], Michael Roche, an emerging markets fixed-income strategist with Seaport Global Securities, said.

“The jury is still out on how high inflation can climb. Their own declaration is a practical stance of watching data point to data point,” Roche told Prospect News. “My own view is that we are looking at two rate hikes rather than three or four [for the year].”

The Fed has raised rates once so far this year.

But another source said that his firm expects a full complement of three more rate increases this year. “The Fed is not concerned with EM right now; it’s not even on their radar screen. It would have to be a big crisis with feedback to U.S. numbers [for it to be a factor,]” the source said.

Despite the slide in emerging markets, the source remains fundamentally constructive on the asset class. “The selloff is not justified at this point, but it becomes a self-fulfilling circle. EM seems to be under attack,” the source said.

Widening of emerging markets sovereign debt yield spread has resumed after a big move in the month of April. “The market digested that move, and then there was the upset in currencies in Turkey, Argentina, and to a lesser extent, in Mexico and Indonesia,” Seaport Global’s Roche said.

“We have yet to find a level in which buyers are emerging. There is an imbalance of sellers and the selling of risk,” he said.

But the drivers behind the imbalance may be subsiding. “There are indications of the U.S. dollar’s rise is starting to arrest. The dollar strength hasn’t been trending lately to the extent to which is was,” Roche said.

And the problems in emerging markets right now are “well known.” Argentina, Brazil and Turkey are pretty much the trouble spots in emerging markets right now, with Mexico a question mark due to its upcoming presidential election and the uncertainty regarding whether the North America Free Trade Agreement can be renegotiated or not. South Africa is also a trouble spot but well known for its issues of high inflation, slow growth and problems including worker strikes. Nevertheless, most of the nervous investors have been wrung out of the market at this point and the remainder are more strategic and unlikely to exit the asset class, Roche said.

Although the downtrend has persisted since April, Roche said that the outlook for emerging markets debt should start to improve given that the currency shocks of the past month are unlikely to be repeated or become contagious.

And better value in the space will become a backstop, sources said. The emerging markets sovereign spread had reached 290 basis points over Treasuries, and now it is 370 bps, according to the JPMorgan Chase & Co.’s EMBI Global Index.

“370 over on EMBI global suggests something close. Buyers will appear at 400 bps,” he suggested.

© 2015 Prospect News.
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