EM reacts to Fed minutes, Greece; Ukraine bonds dip; Kazakhstan CDS widen, currency falls

By Christine Van Dusen

Atlanta, Aug. 20 – Asian credits were volatile while other risky assets continued correcting on Thursday morning after the Federal Reserve’s recent minutes – which showed that officials are closer to increasing the benchmark rate – and on the news that Greece’s prime minister resigned.

The minutes “added to disinflation fears,” according to a report from Barclays Capital. “These concerns escalated last week following China’s decision to weaken [the currency] versus the U.S. dollar. The minutes revealed that members need more evidence that inflation is moving toward goal and the labor market improvement is sufficient and sustainable.”

The news from Greece also contributed to the day’s volatility. Prime Minister Alexis Tsipras announced his resignation and called for new elections that would be held sometime on or near Sept. 20. This followed Wednesday night’s news that euro-area finance ministers had signed off on the country’s third bailout, allowing Greece to give the order to repay about €3.2 billion of bonds held by the European Central Bank.

Greek bonds declined in response, a trader said.

Also on Thursday, market-watchers were keeping an eye on Kazakhstan, which saw its currency fell 23% after allowing its currency exchange rate to float overnight. This was seen as a response to China’s recent devaluation of its currency.

Kazakhstan’s sovereign notes fell and its five-year credit default swaps spreads moved up by about 12 basis points, a trader said.

And from the Middle East, Dubai’s 5¼% 2043 dollar notes were 20 bps wider on the day, trading between 88 and 89, another trader said.

Asia in focus

Buyers emerged for China-based Cnooc Ltd.’s 2025 bonds, then sellers emerged after the London open.

“Korea was 1 bp to 3 bps wider,” a trader said. “India held in firm for most of the day.”

Bonds from Malaysia widened between 3 bps and 8 bps, he said, while Malaysia’s Petroliam Nasional Bhd. (Petronas)] saw sellers.

“Mediocre jobless claims and rising Treasuries continue to slam credit lower here,” another trader said. “Pretty weak here, with the market skewed heavily to selling.”

High-grade corporates from China were “muted,” he said.

Lat-Am widens

From Latin America, low-beta spreads were wider on the day as uncertainty in global markets kept risk appetite low, a New York-based trader said.

Five-year credit default swaps spreads for Brazil closed at 329 bps from 322 bps, and Mexico’s moved to 148 bps from 147 bps.

Cash prices declined on light volumes and liquidity, he said.

Venezuela’s 2027s closed at 36 from 36.25, and PDVSA’s 2027s moved to 36 from 36.25.

Ukraine bonds decline

Looking to Ukraine, sovereign bonds have dipped amid some “anxiety in the market,” said Fyodor Bagnenko, a fixed-income trader with Dragon Capital.

“With Wednesday marking exactly five weeks to the Sep. 23 maturity, no news on debt restructuring talks yesterday resulted in some anxiety in the market, pushing the sovereign a point lower,” he said.

Quasi-sovereigns also weakened slightly, he said, “while offers prevailed in the corporates, but with not much actual trading.”

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