Morning Commentary: Chinese data, Saudi Arabia turmoil send EM spreads wider; Brazil strengthens

By Christine Van Dusen

Atlanta, Jan. 5 – Emerging markets assets moved wider on Tuesday morning as investors continued to worry about the economy in China, which this week released factory activity data that sent stock markets plummeting.

“A pretty tough start to the year, with credit wider and equities posting decent losses across the board as fears of a Chinese hard landing hit the market again,” a trader said. “Flows were mostly positive, with the Street market bonds and credit default swaps wider with the macro weakness.”

The execution of a prominent Shia cleric in Saudi Arabia, as well as the burning of the Saudi embassy in Tehran, also took their toll on investor sentiment, another trader said.

“After Saudi Arabia cut ties with Iran and expelled Iran’s ambassador already on Sunday, several of the kingdom’s allies followed suit,” he said. “Bahrain and Sudan declared yesterday that they too would sever their relationship with Iran while the UAE said that it is recalling its ambassador from Tehran.”

Bonds from Turkey – which on Monday widened as much as 13 basis points – opened Tuesday a few basis points tighter as the prime minister met with the chairman of the opposition party to discuss a new constitution, another trader said.

“On valuation, Turkey does look tight versus the [emerging markets] complex, and I guess we are not seeing the benefit yet of lower oil prices come through to help inflation,” he said. “Structural issues keep inflation stubbornly high.”

Corporates from Turkey saw a little bit of demand while sellers emerged for short-dated banking bonds, he said.

“I guess, with the widening, supply is less likely to come yet, as banks and savvy corporates wait for better issuance windows,” he said.

Brazil bonds improve

Looking to Latin America, notes from Brazil managed to open strongly on Tuesday, a New York-based trader said.

“The belly of the curve is on fire,” he said. “Not surprisingly, this segment took the brunt of the pain yesterday and, in general, the last couple of weeks underperformed.”

Volatility is expected to continue for EM, another trader said, but issuance should pick up.

“I think 2016 will see more issuance, so this dynamic should be diluted somewhat, smoothing the positive spikes,” he said. “Issuers are finally waking up to the fact that spreads are wider and rates are moving up.”

© 2015 Prospect News.
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