Morning Commentary: Investors shun risk; EM spreads widen; Kazakhstan, Turkey, Greece in focus

By Christine Van Dusen

Atlanta, Aug. 21 – Investors avoided risk as weakness continued for Asian assets on Friday – following disappointing economic data from China – amid concerns about the global economic picture and oil prices.

Also contributing to volatility in emerging markets on Friday was the evolving picture in Greece and the devaluation of Kazakhstan’s currency.

“Asian credits continued to sell off, with investment-grade cash closing 3 basis points to 8 bps wider,” a London-based trader said. There was a “very cautious tone, with most accounts either sidelined or trimming non-core risk.”

Some sellers were seen at the London open, and oil-related credits from China held in well, he said.

“Tensions between North and South Korea didn't affect spreads much, with the sector performing in line with the market,” another trader said.

Ten-year notes from South Korea closed 3 bps to 5 bps wider while the five-year notes moved out by about 2 bps and saw some buyers.

“India was quiet, but spreads are anywhere from 5 bps to 10 bps wider,” he said.

“In Malaysia there was good two-way, with the [Petroliam Nasional Bhd. (Petronas)] curve 5 bps wider.”

Petronas’ 2019 bonds traded at 130 bps after being sighted at 135 bps.

Other emerging markets bonds traded “fairly well, given the weakness in Asia,” another London-based trader said.

“Taking a step back and looking at spreads, they’re testing December wides – when the growth scare was at the forefront – which makes me think the risk-reward is fairly appealing here.”

He suggests picking credits with strong fundamentals that are likely to “weather the storm,” he said.

Kazakhstan currency rebounds

The news that the government in Greece would call for early elections, to take place on Sept. 20 “took a toll on Greek assets,” according to a report from Schildershoven Finance BV.

From Kazakhstan, the currency slightly rebounded into the end of the week after falling on the news that the sovereign was allowing its currency exchange rate to float overnight, a move seen as a response to China's recent devaluation of its currency.

“However the risk of further devaluation persists, as the tenge rate is more sensitive now to oil price moves,” the report said.

“On the other hand, we would like to note that after the recent correction, Kazakh sovereign euro bonds look quite attractive, especially the issue due in 2025.”

Turkey bonds get a bid

Looking to Turkey, long-dated sovereign paper got a lift, leaving the bonds firmly bid on Friday morning, he said.

“The macro environment is still a net positive for Turkey, and in true EM style eventually we will muddle through the political situation,” he said. “I agree that the fiscal target may slip and structural reforms will be left on the back burner.”

But it's still a “functional market,” he said, given that so many other emerging markets – like Brazil, Russia and Africa are suffering so much during the rout in commodities.

Corporate paper from Turkey tracked the sovereign, but buyers were seen for some paper at the lows, he said.

China Everbright trades

The new issue of notes that China Everbright Bank Co. Ltd. priced on Thursday – $450 million 2 7/8% notes due 2018 at 99.789 to yield 2.949%, or Treasuries plus 195 bps – ticked up in trading on Friday morning, a trader said.

BOC International, China Everbright Securities, Standard Chartered, Wing Lung Bank, CMB International Securities, ICBC and OCBC were the bookrunners for the Regulation S deal.

The final book was $1.9 billion from 87 accounts.

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