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Morning Commentary: EM debt muted as markets eye Fed for clues on tightening pace
By Rebecca Melvin
New York, Dec. 19 – The emerging markets debt market was treading water on Wednesday, with spreads somewhat firmer compared to Tuesday, while the primary market remained dormant as the window for pricing before year-end looked virtually shut.
Financial markets were focused on news expected later in the session from the U.S. Federal Reserve, when policy makers were expected to raise the central bank’s target rate by 0.25%, its fourth and final boost this year, and to signal its pace of tightening next year.
But whether the market was expecting too much was questioned. “It seems like the market expects too much. Presumably, its going to make some changes, a New York-based market source said of the Fed, “But [the market] may be pricing in a lot more dovish mood than it should.”
Fed futures have been getting progressively more optimistic as people get more downbeat about the economy, the source said.
Meanwhile, the iShares J.P. Morgan U.S. dollar emerging markets bond ETF was up about ¼ point in the early going, bouncing off a better than 1-point drop on Tuesday when a slide in oil prices pulled EM debt down.
West Texas Intermediate crude oil prices were last up $1.11, or 2.4% at $47.35 a barrel on the New York Mercantile Exchange, recovering somewhat from a 7.3% drop on Tuesday.
The oil market has been hit by waves of oversupply and slowing growth worries with oil prices down about 40% from October.
Given where markets are now and how quiet the primary market has been, “it’s hard to imagine that we’re going to come back in January and everyone is going to be in a good mood. It’s likely to be a slow start,” the source said.
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