Morning Commentary: Market volatility hamstrings EM trading; most bonds unchanged or slightly wider

By Christine Van Dusen

Atlanta, Aug. 31 – Emerging markets bonds drifted wider on Monday morning, a holiday in the United Kingdom, as equities and commodities sold off amid continued market uncertainty.

“The Fed’s policymakers have announced that, despite a high level of market volatility, they are staying the course. A group of authorities are expecting that inflation in the United States will start to increase as the main factors holding down inflation dissipate further,” according to a report from Schildershoven Finance BV. “They also cautiously signaled that September is still on table for an interest rate hike.”

But other officials from the Fed have said a rate hike in September is becoming less likely.

“According to the market, the probability of the first interest rate hike happening in September amounted to 38%, while it was 24% on August 26,” the report said. “The market estimates there is a 49% chance of the Fed’s decision happening in October. The growing probability of an earlier interest rate decision will negatively influence the market.”

In response to the volatility and the U.K. holiday, volumes were light for emerging markets assets on Monday morning, a London-based trader said.

“In the absence of any specific news flow to boost risk appetite, credit markets are drifting wider,” he said.

Bonds from Philippines were mostly unchanged amid limited liquidity while high-grade names from Asia moved no more than 2 basis points wider, he said.

“After a firm Friday night, Indonesia’s 2045s – up at 93 left bid, at the time – are now down 1/4-point in the belly from the Friday close and down 1/8 point on the long end,” another trader said. “The 2045s are wrapped around 92¼.”

Meanwhile, trading of Latin American assets on Monday morning was “very quiet,” a New York-based trader said.

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