'Rude awakening' for EM goes on; weak session, poor liquidity; Brazil instability takes toll

By Christine Van Dusen

Atlanta, June 24 - Emerging markets assets put in another weak session on Monday as instability in Brazil and Turkey added to the volatility created by higher U.S. Treasuries and ongoing concern about the Federal Reserve's bond-buying program.

"Very weak session across the board as the vicious combination of the US Treasury move, dealer apathy, Street long, most locals sitting tight and left-field sellers helps to make this one very tricky market," a London-based trader said. "Of course we all knew the punch bowl would be drained at some point, but the speed of the unraveling in the past six to seven weeks has been impressive in its scale and tone."

Investors were still reeling from the news that the Fed will likely taper back its bond-buying program.

"The timing and speed of the impending wind-down of Fed asset purchases will likely be hotly debated in the weeks and months ahead," according to a report from Barclays. "Economic data will be highly scrutinized and signs of robust labor market gains, stable housing markets and improving inflation outcomes could increase the likelihood of an earlier taper and an eventual rate hike. For markets that had become used to the so-called 'QE infinity,' the past few weeks have been a rude awakening."

Then came the protests in Brazil. On Sunday, more than 60,000 people protested against government corruption and in favor of better health care and education.

This instability in Brazil is taking its toll on assets denominated in Brazilian reais, said Irina Skrylev, associate strategist at RBC Dominion Securities.

"As heightened inflation has led markets to price in over 250 basis points in rate hikes by year end, there is little upside for the Brazilian real this year, even in the presence of further rate hikes," she said.

Late gains for Lat-Am

Bonds from Latin America opened weaker and wider on Monday, a New York-based trader said.

"Everyone sat back with no liquidity and watched our off-the-run high-grade credits re-price lower again, leaving us wider by 25 bps to 35 bps," he said. "We are becoming robot-like to US Treasuries, and when they caught an afternoon bid, we were able to take a step back up into the close."

Some names got a late-day lift, including Mexico-based Cemex SAB de CV's 2022s at 107 and Brazil-based Petroleo Brasileiro SA's (Petrobras) 2023s.

"Some accounts were caught starry-eyed by the sticker shock and decided to hold," he said. "Will be interesting to see the Asia and European openings to see if there is any follow-through from our close on the uptick."

Perpetuals lose ground

Liquidity on Monday was poor for assets from the Middle East and North Africa, the London trader said.

In trading, perpetual notes suffered. Dubai Islamic Bank's perpetuals, which priced at par, were seen at 951/2, while Abu Dhabi Islamic Bank's traded at 97½ after also pricing at par.

"Clearly there's some value out there now, however it's not really about value here," he said. "It's liquidity, it's margin calls, it's rates and it's technicals."

Repricing in Middle East

The positive technicals previously present among Middle Eastern and African bonds have largely evaporated, a trader said.

"Even previously sticky and very tricky-to-find bonds are coming out," he said. "Lower-beta names like Saudi Electricity Co., Abu Dhabi National Energy Co., IPIC and Qatar - who have curves out to the long end - have seen some serious repricing."

'Not for the faint-hearted'

In other trading from the Middle East, Dubai's 2021 notes were sighted between 104¼ and 105.35, about 15 bps wider. The 2020 notes from International Petroleum Investment Co. were seen between 105¼ and 1063/4, about 20 bps wider.

"IPIC's 2041s that traded last week at 128 are this week at 115," a trader said. "Not for the faint-hearted, this market."

Qatar's 2022s traded at 105¼ on Monday, or 10 bps wider on the week.

Dubai names in focus

Also on Monday, Dubai-based DPWorld's 2017s were quoted between 106 and 107, about 55 bps wider on the week.

And Dubai-based Dolphin Energy's 2019s moved to 106¾ bid, 107¾ offered.

"There are actually some buyers around," a trader said of that bond.

Outflows likely again

With all of this as the backdrop, emerging markets funds are in danger of even greater outflows this week. Last week, outflows hit a 90-week high of $2.64 billion, according to data-tracker EPFR Global.

"The increased exposure of traditional developed market investors has left EM vulnerable to additional outflows," according to a report from Commerzbank. "This has been emphasized by EM political risk worries returning to the screen - Brazil and Turkey - as well as noise out of the Chinese banking system."

Meanwhile, issuers stayed on the sidelines on Monday.

"It's pretty quiet on the new issue front, as you can imagine," a New York-based syndicate source said.

© 2015 Prospect News.
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