EM debt lags as Q3 starts with holiday-shortened week; Mexico bonds mostly retrace gains

Rebecca Melvin

New York, July 2 – Emerging markets debt was weighed down in quiet trade on Monday as the broader markets started the third quarter on a downbeat amid trade-risk concerns. Stocks retraced losses into the market close in New York however as the Trump administration stepped back from imposing new restrictions on Chinese investments in the United States, but emerging markets remained under pressure amid persistent dollar strength.

The week’s activity was expected to be subdued with U.S. markets closed on Wednesday in observance of Independence Day.

A trader of Middle East and Africa debt said that the market was “very dull” ahead of the holiday on Wednesday.

A New York-based syndicate source said the week was expected to be “very quiet.”

Although the emerging markets debt primary has been quiet for several weeks amid market volatility, now that summer holidays are thinning the ranks of market players at their desks, there is an added deterrent to deals.

“I think it will be a typical summer where there will be some opportunistic deals, but generally quiet,” the syndicate source said.

Mexico’s bonds were mostly lower, and the Mexican peso slid after Andres Manuel Lopez Obrador, or AMLO, of the National Regeneration Movement, won handily the country’s presidential election on Sunday as widely expected.

The victory was called a landslide and his party was expected to take a broad swath of both houses of Congress as well, reducing the ruling Institutional Revolutionary Party, or PRI, to less than half and potentially wiping out the leftist Party of Democratic Revolution, according to early tallies.

The country’s long bonds mostly retraced gains notched on Friday. The bonds of Petroleos Mexicanos SAB de CV were also weaker. And the Mexican peso slid lower, extending weakness heading into the election. There are some pundits, however, who feel the election result was mostly priced in so the peso could revive from here. But the market close was right around 20 pesos to the U.S. dollar, which was down 1% in line with the overall emerging markets currency market and a drop back to last Thursday’s levels.

AMLO’s next moves in focus

Mexico’s 4.6% notes due 2046 fell nearly a point to slightly over 91 on Monday.

Pemex’s euro-denominated 4¾% notes due 2029 were down 0.5% at 99.85. The Pemex euro 3¾% notes due 2026 traded down at 98.115, which is slightly off the lows but still down substantially since a slide that began at the end of May. But the Pemex euro-denominated shorter-dated 3¾% notes due 2024 were up 0.2% at 101.41.

How investors will sift out regarding the victory for Mexico’s leftist candidate was not certain. There were also questions on what influence it would have, if any, on the rest of the Latin America international debt space.

Fund flows, which will have been negative recently, could also be a factor. But it was not known what the impact would be, according to a New York-based market source.

“Everyone is going to be focused on what is said and what AMLO is going to do with a bunch of important state-owned companies. It will be interesting where it goes from here,” the source said.

The source was referring to what the president-elect will call for in terms of oil exploration contract awards to international firms and whether they will be handed back to Pemex.

AMLO campaigned on promises to increase pensions for the elderly, increase education grants for the young and increase programs to support farmers. But he has also promised not to raise the national debt, to work on the North America Free Trade Agreement renegotiation and otherwise maintain close relations with the United States. He has appointed a respected representative to handle NAFTA, and he has managed to work with the private sector in the past. The new president-elect is the former mayor of Mexico City.

There are questions regarding how any weakening of Mexico credit would affect other sovereign and corporate debt in the region. But for now there strategy is to wait and see. NAFTA and other trade tariffs are also wildcards as is U.S. monetary policy. Attention will shift this week to the release of the U.S. Federal Reserve minutes on Thursday and the U.S. jobs report for June to be released on Friday.

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