EM trading 'choppy,' prices firm; Abu Dhabi, Saudi Arabia, Qatar hold well; buyers emerge

By Christine Van Dusen

Atlanta, Aug. 19 - Trading was choppy and flows were light for emerging markets assets on Friday, following a week made tumultuous by continuing concern about the global economic picture.

"Quiet end to another eventful week," a trader said. "We had a little squeeze into the close on broader markets as oil bounced, governments sold off and stocks turned around, but we've since faded a little."

Prices stayed fairly firm, mostly because selling was limited, another trader said.

"For prices to go down, you need sellers. So despite equity markets in Russia, Ukraine and Turkey all back to the lows, the dearth of selling in cash bonds means we hold solid as a rock," he said. "Listening to my brokers ask me for offers all day helps me empathize with the poor gold traders who must be suffering the same fate."

Middle Eastern names managed to hold particularly well, especially credits from Abu Dhabi, Saudi Arabia and Qatar, he said.

From Qatar, the 2040 bonds were seen up at 124 on "superb demand" while the 2030s were at 163.5, he said. Buyers were also seen for Lebanon, and two-way action was reported for HSBC Bank Middle East, International Petroleum Investment Co., Abu Dhabi National Energy Co., Dubai and Dubai Water and Electricity Authority.

"It's not hard to see why Qatar is rallying," he said. "If demand keeps up for the region, I'm sure the syndicate desks will come back from their summer holidays and get their pitches out."

Other higher-yielding names, however, were soggy, he said. But spreads, over the week, looked good overall.

"That illustrates how there has been more demand for this part of the world since last Friday and how we also witnessed nowhere near the selling pressure that occurred last Wednesday and Thursday," he said.

Turkey sees buyers

In other trading, Turkey saw relatively few prints on the Street.

"We saw good buying interest on both corporates and sovereigns today," a London-based analyst said. "Sovereigns were lifted several times during the day, mainly on the long end of the curve as the equity market recouped its earlier losses."

Locals expressed interest in Garanti Bankasi AS, Akbank and Yapi Kredi, he said.

Looking to Russia, spreads were tighter, a trader said.

"Despite Russian stocks being off 3%, we see no selling," he said.

Positive shock needed

With investor confidence slipping, the market needs a big positive shock via further quantitative easing in the United States, new liquidity measures in Europe or sustained growth in core markets, according to an RBC report.

"EM has largely been an innocent bystander amidst the recent turmoil, but the key wildcard now is to what extent EM growth is impacted by the recent downturn in developed market growth and financial markets, and to what degree and how quickly EM policymakers will act to cushion their economies by potentially shifting back to more stimulative fiscal and monetary policies," RBC said.

"How well EM growth holds up is becoming ever more important for the global economic outlook, with consensus now expecting EM economies to generate 70% to 80% of 2011 and 2012's expansion. As it seems probable that external demand will remain sluggish in the near term, the resiliency of EM domestic demand will be key," according to the report. "Thus, EM domestic demand indicators should be watched closely over coming weeks and months."

Funds see outflows

Emerging markets bond funds saw outflows of $562 million for the week ended Aug. 17, the second week of outflows in a row and the first back-to-back outflow since February, according to a report from data tracker EPFR Global.

"Worries about the weakness of global economic growth kept the pressure on most fund groups during the third week of August as investors reassessed the ability of governments and corporations to service their debts in the face of weaker earnings and tax receipts, the willingness of consumers to keep spending and the outlook for exporters," EPFR said in a report.

While EM bond funds overall posted outflows, funds with local currency mandates managed to report inflows of $273 million for the week, extending a streak that began in the third week of March.

"Actively managed funds still dominate this space but [exchange-traded funds] are beginning to enlarge their share," EPFR said. "Since the beginning of the year the assets under management in EFS have grown 43% versus 33% for non-ETFs."

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