EM debt weak as yuan drops again; Argentine peso sharply lower, but century bond recovers

By Rebecca Melvin

New York, June 28 – A negative tone in emerging markets credit persisted on Thursday in generally thin trading as another drop in the value of the Chinese yuan against the U.S. dollar and other currency weakness promoted a risk-off tone, according to market sources.

The People’s Bank of China set the dollar’s reference rate at 6.596 yuan, 0.6% lower than on Wednesday and putting it down 1.8% against the dollar this week. For the year, the yuan is 1.6% lower against the dollar.

The move supports a premise argued by some analysts that China could use currency devaluation to combat U.S. tariffs on its Chinese imports.

The Argentina peso fell more than 1% on Thursday to about 28.00 to the U.S. dollar, and Argentina’s central bank stepped in to support the currency. But the Brazilian real and South African rand, which weakened sharply on Wednesday, were flat to down only 0.1%. The real was 3.86 to the dollar last, and the rand was 13.84.

Liquidity was generally light as the summer holiday period has kicked in amid the general weakness, and there was little primary market activity. However, South Korean steelmaker Pohang Iron and Steel Co. (Posco) announced that it has mandated banks and scheduled a roadshow for a dollar-denominated issue of notes.

BofA Merrill Lynch, BNP Paribas, HSBC and Standard Chartered Bank will arrange the series of fixed-income investor meetings beginning July 9 for the Rule 144A and Regulation S notes.

Currency drives sentiment

“The currency market was driving sentiment in emerging markets debt, with a focus on the Asian currencies of late, which have lead the markets in weakness,” said Michael Roche, emerging markets fixed-income specialist with Seaport Global.

According to the J.P. Morgan emerging markets currency index, Asian currencies are down 2.8% in the past week, Latin America currencies are down 3.3%, and emerging Europe currencies are down 1.8%.

The 2% drop in the Chinese yuan in the last week has led to weakening in other Asian currencies as they weaken as well to remain competitive. This move is creating weakness in corporate credit valuations with the iShares MSCI Emerging Markets ETF, which tracks the investment results of an index composed of large- and mid-capitalization emerging market equities, having fallen 4% in the last week.

“This is feeding into equities and bonds over the past week,” Roche said. And this eventually gets through to U.S. dollar-denominated debt.

Argentina’s bonds recover

The J.P. Morgan Emerging Markets Bond Global index finished on Thursday with a sovereign yield spread of 387 basis points over Treasuries, but that was better than the intraday spread of 390 bps over. Likewise, some bonds recovered some ground by the end of the session. Argentina’s century bond, for example, was closing round 77.7, which was off the bottom of 76.8 at the low on Thursday and down only 0.3 point compared to an open at 78.

“It recovered all of its losses today. It traded sort of like a V,” Seaport’s Roche said. Nevertheless, the issue that priced exactly a year ago, was trading at record yield.

Meanwhile, Moody’s Investors Service published a report on Thursday that pointed to sovereigns most exposed to risks associated with dollar strength. Heading up the list was Argentina and Ghana, while Mongolia, Pakistan, Sri Lanka, Turkey and Zambia were also included.

Chile, Colombia, Indonesia and Malaysia are also vulnerable to the strong dollar, but there are financial and institutional factors that make it a lesser threat for them, the Moody’s report pointed out.

Elsewhere, Brazil’s central bank cut its forecast for 2018 gross domestic product on Thursday as it accounts for the effects of a nationwide truckers strike that hurt key sectors of its economy. The central bank sees GDP growth of 1.6% this year compared to 2.6% previously.

© 2015 Prospect News.
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