Emerging market credit quiet ahead of Fed news; Asia primary continues to price deals

By Rebecca Melvin

New York, Dec. 13 – Emerging market credit was subdued on Wednesday as investors awaited the U.S. Federal Open Market Committee’s statement and economic projections from its last meeting of the year.

As expected, the Fed raised its benchmark rate by a quarter of a percentage point, to a range between 1.25% and 1.5%, and revised its economic growth projection upward while maintaining its expectation for three more rate increases in 2018.

After the decision was released, a New York-based trader said activity in the Latin America region was subdued.

The Argentina century bond was little changed at 102˝ bid, 103˝ offered.

Before the decision was released, a London-based market source said, “In CEEMEA, the secondary market is relatively quiet and the primary world is ready for Christmas.” CEEMEA refers to the region of Central & Eastern Europe, the Middle East and Africa.

The Fed predicted stronger economic growth over the next three years, including a 2.5% growth rate in 2018, which was higher than its previous forecast published in September of 2.1% growth.

“The labor market has continued to gain strength and that economic activity has been rising at a solid rate,” according to the statement.

In addition, the Fed officials predicted that inflation would stay below the Fed’s 2% target next year and then stay at 2% in 2019 and 2020. With inflation expected to remain under control, Fed officials forecast the benchmark rate would rise to 3.1% by the end of 2020, up slightly from the last forecast of 2.9%.

The rate increase on Wednesday was the Fed’s third increase this year and “has been fully priced in for a quite an extended period of time,” a source said. The questions that remain are regarding whether two or three hikes are in the cards for next year, as well as projections on inflation, economic growth and unemployment. The central bank statement and forecast was released at 2 p.m. ET.

Emerging market credit, which have put in strong returns this year, are less vulnerable to central bank policies of the developed world than before as their economies have continued to grow, but higher U.S. rates make emerging market stocks, bonds and currencies less attractive to investors in general.

There were no new deals announced or priced in CEEMEA or Latin America, but a couple of deals priced out of the Asia region.

China’s CIFI Holdings (Group) Co. Ltd., a Shanghai-based property development business, priced $300 million of senior perpetual capital securities at par with a 5 3/8% initial distribution rate, and Beijing-based lender Industrial and Commercial Bank of China Ltd. issued $900 million of floating-rate medium-term notes, including $600 million of notes due 2020 and $300 million of notes due 2022.

The European Central Bank and the Bank of England will both make decisions on Thursday. But they are expected to keep their monetary policy stances unchanged.

In terms of quantitative easing, the ECB is expected to purchase €30 billion a month until September 2018 before a gradual decay to zero, according to Bank of America economists.

And while the ECB comes in as a dim second in terms of its importance to emerging credit markets, the risks to emerging markets are a more aggressive withdrawal of central bank stimulus, either because there are signs of a pick-up in core inflation, or a significant change in the thinking of the Fed or ECB.

© 2015 Prospect News.
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