Morning Commentary: China cuts interest rates, reserve requirements; risk appetite, tone improve

By Christine Van Dusen

Atlanta, Aug. 25 – Most emerging markets assets improved slightly on Monday morning – with some Asian assets stabilizing on the news that China cut its interest rates and lowered banks’ reserve requirements – as investors continued to deal with the massive losses in Chinese equities.

“Risk had edged up all morning and then, post-China’s [reserve requirements] cut announcement, spreads ripped tighter, with all reasonable offers lifted in the screens,” a trader said. “Strong price action in Russia banks.”

Central and emerging Europe, the Middle East and Africa credit traded “with a better tone, with credit default swaps and indexes tightening but little trading in the cash market,” a London-based trader said. There was “a mixed open, with Chinese equities in deep losses, but the rest of Asia has stabilized a bit from yesterday’s macro-risk shock, with Indonesia trading 10 basis points to 15 bps tighter.”

High-grade notes from China were under pressure, but “two-way flows emerged,” he said. There were “buyers of longer Korea corporates today, and Indian three- to four-year financials are seeing some two-way flows, with buyers locally and sellers coming out of Europe.”

Asian sovereigns began to regain some ground, “which felt insignificant in the scheme of recent moves, but somewhat satisfying, as levels held while China collapsed,” he said.

Buy flows returned to the Philippines curve, another trader said.

From Turkey, sovereign bonds traded “fairly well, given overall market price action and current political risk,” another trader said.

Some buying was sighted at the European close, he said, but price action was limited as dealers stayed cautious in the low-liquidity environment.

Turkey’s bank and corporate paper traded closer to the bid side of the market and remained under pressure, he said.

“Valuations are becoming fairer, in some spots,” he said. “Subordinated debt remains cheap versus seniors.”

Oil credits, meanwhile, “haven't caught a bid yet in any meaningful size, as the fundamentals remain weak,” another trader said.

© 2015 Prospect News.
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