Market tone strong as EM sees busy primary; Uruguay prices $1.1 billion; Venezuela quiet

By Rebecca Melvin

New York, Sept. 8 – Market tone in the emerging debt capital market in the Latin America region improved this past week amid generally better currencies bolstered by lower U.S. Treasury yields, a market source said.

The step down in U.S. Treasury yields, which left the benchmark 10-year Treasury note on Friday at 2.054%, means “there is less pressure on that side spilling over to EM and [the credit assets] are performing even better than the fundamentals of Latin America,” an economist said.

Right now Latin America is attractive, and the tone is optimistic. The long end of the curve is well supported and even expensive, but the optimism has promoted flows there, the economist said.

Uruguay’s new $1.1 billion equivalent of 8 ½% peso-denominated notes capped off a busy, holiday-shortened week in the primary market.

This positive tone is evident in other regions as well.

“Appetite for emerging market assets has been quite strong for the year so far and now with the compression of spreads we see more demand for lower quality assets,” Guillaume Tresca, senior emerging market strategist for Credit Agricole CIB, told Prospect News.

“If I am right, five countries rated B- have issued so far this summer. The appetite is still present and the timing for these issuances is perfect. Turkish issuance went well and the South African one too,” Tresca said of new issuance.

However, sentiment is turning more fickle and it could change rapidly, Tresca warned. The strategist pointed to the monetary policy setting meeting by the Federal Reserve Open Market Committee on Sept. 20 as the next event to be watched.

“We will see if they are really ready to hike in December,” Tresca said.

Currently the market is pricing in a 20% chance for a rate hike. The gap is huge, but as long as Treasuries remain in check, countries in the Central & Eastern Europe, Middle East and Africa and elsewhere “can continue to issue easily.”

While the tone in Latin America credit improved overall this past week amid generally better currencies, there are some red flags. Mexico, for example, may see this trend reverse if there is not an inflection point in inflation performance, a source said. And storms battering Gulf Coast refineries and their economic impacts are throwing some doubt about whether Mexico can so this. Because of the storm the price of gasoline continues to be high and that will have an impact on inflation.

The question is when and how much expense Petroleos Mexicanos will pass on to consumers. How much of the higher cost given those refinery shutdowns related to the storms will be allowed to flow through.

Currently inflation in Mexico stands at 6.7%, which is well above the stated central bank target for inflation of 3% plus or minus 1%.

Factors that will determine if the country remains at this high inflation point or not will be the ongoing price of gasoline, economic performance and performance of the currency, the economist said.

As for other regions, this holiday-shortened week was positive with a somewhat quiet tone. U.S. markets were shut on Monday in observance of Labor Day.

Chile was sideways, Brazil was optimistic given an improved political tone, and Venezuela was quiet, sources said.

Two actively traded Petrobras issues were mixed on Friday, with the Petrobras 8 3/8% notes due 2021 down ¼ point to 114, while the Petrobras 7 3/8% notes due 2027 moved up to 111.8 from 111 on Thursday.

For the week, there were no real movers in the Venezuela curve and with only 2017 and 2020 Petroleos de Venezuela SA moving in a notable way. The 2017 and 2020 notes crept a little higher by 1 to 1½ points, a market source said, leaving the PDVSA 2020 notes at about 75 and the PDVSA 2017s at about 91½ on Friday, the source said.

“Investors are still expecting [the government] will make the October and November payments,” the source said of Venezuela.

Otherwise, the curve was quiet this past week, as market players continue to evaluate the impact of U.S. sanctions against the regime of President Nicolas Maduro.

“People who have been cautious remain cautious, and others don’t want to add to positions right now,” the source said.

Meanwhile, Maduro opposition protests have quieted as those citizens against the oppressive government pin their hopes on December regional elections.

“It’s hard to see regime change right now or next year. There is no struggle, but the economy is getting worse. It is not easy,” the source said.

© 2015 Prospect News.
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