Morning Commentary: China devalues currency again; EM bonds widen; Icici sees profit-takers

By Christine Van Dusen

Atlanta, Aug. 12 – Most emerging markets assets were wider on Wednesday morning, with investment-grade cash bonds from Asia moving out as much 10 bps, after the central bank in China devalued its currency for the second day in a row.

The currency hasn't been lowered this much over a two-day period in more than 20 years.

“We dived lower on the open,” a trader said. “Bid requests are filling our screens, from uncertainty over what the moves in China mean.”

Meanwhile, a rally in U.S. Treasuries lured out outright sellers, and things turned worse, post-London open,” a London-based trader said. “The oil sector initially had good support, with Cnooc Ltd.'s 2025 holding at 180 bps. But that broke in the afternoon, and bonds closed at 185 bps bid, 182 bps offered.”

Technology bonds from China widened by about 10 bps, with five-year notes faring best, he said.

“India is 3 bps to 5 bps wider,” he said.

Profit-takers were seen for India-based Icici Ltd.'s new 3 1/8% 2020s, which traded Tuesday at 158 bps after pricing at 160 bps.

The short end is “still seeing good demand,” he said.

Spreads are reaching the wides of December, when there was a liquidity crunch and concerns about global growth, another trader said.

“However, over the last few hours it feels like the storm is calming over China,” he said. “People are slowly digesting that the devalue is not necessarily a bad move and China is using it as another tool to support the economy.”

Rates, he said, “are super-bid. I guess we are pricing [in that the] macro is too weak for the Fed to rock the global growth boat and raise rates next month.”

Ukraine in focus

Some investors on Wednesday were taking note of Fitch Ratings’ new upgrade of State Export-Import Bank of Ukraine's (Ukreximbank) long-term foreign-currency issuer default rating to CCC from RD and senior unsecured debt rating to CCC from C.

“With the latest upgrade, the eurobonds of Ukreximbank have a higher rating than Ukraine sovereign notes, which have yet to be restructured,” according to a report from Alexander Paraschiy of Concorde Capital. “The bank’s rating is currently on par with the highest ones among Ukrainian issuers.”

A similar upgrade is expected for JSC Oschadbank, as well as Ferrexpo plc and MHP SA.

Meanwhile, violence in the Donetsk region of Ukraine calmed a bit on Wednesday, but the situation remained tense, the report said.

“The conflict has no end in sight and continues to threaten Ukraine’s political and economic stability,” said Zenon Zewada of Concorde, in another report. “On a larger scale, neither Russia nor the West are backing down from their positions in the conflict, which ensures its continuance for many months to come.”

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