U.S. tax reform bill eyed as support grows; Brazil focus to shift to 2018 elections

By Rebecca Melvin

New York, Dec. 15 – Friday’s emerging primary markets continued to see a small number of new issues price out of Asia, but other regions were mostly quiet to close out the week. The secondary market maintained a muted but steady stance as expectations grew that the U.S. Republican tax reform bill had gained enough backing to withstand a Senate and House vote next week.

On Friday the GOP picked up the backing of senator Marco Rubio (R., Fla.) and senator Bob Corker (R., Tenn.). In the broader markets, U.S. stocks surged, adding to already stellar gains for the year so far. The Dow Jones industrial average gained 143.08 points, or 0.6%, to 24,651.74, putting its return for 2017 so far at 25%. The S&P 500 closed up 23.06 points, or 0.9%, to 2,675.81, a climb of 20% for the year to date.

Petroleo Brasileiro SA’s 8 3/8% notes due 2021 traded up to a price of 114.125 to 114.25 after slipping on Thursday to around 113.5.

Postponement of a vote on Brazil’s pension reform bill to February hasn’t caused “huge selling,” a New York-based market source said regarding news of the delay that jarred the market on Thursday.

“People have been adjusting down their expectations over time as it became watered down,” the source said. “By the time you get to February, there is likely to be some additional information and shape to elections, and that may take more attention.”

Brazil is one of several Latin American countries with elections scheduled in 2018. Brazil’s presidential election will be held in October. Colombia has elections scheduled in May and Mexico in August.

Outflow in EM bond funds

Emerging market bond funds experienced net redemptions in the second week of December ahead of the U.S. Federal Reserve’s third rate hike for 2017, EPFR Global reported.

There was an outflow of $311.52 million for all dedicated emerging markets bonds funds, including those devoted to the dollar-denominated trade and those with local currency bonds, representing only the fourth time this year that an outflow has occurred and a big improvement on the $1.17 billion net outflow for the week before 2016’s last Fed meeting on Dec. 14, 2016.

“It wasn’t very dramatic,” EPFR’s Cameron Brandt said of this past week’s outflow.

The other outflows of 2017 included a $373 million outflow in the fourth week of January, a $79 million outflow in the second week of August and a $118 million outflow in the second week of November.

The outflows seemed to be tied to concerns related to U.S. interest rates, Brandt said.

Added together the year’s outflows to date total $881.52 million, which is a mere pittance compared to a net inflow for the year to date of $76.9 billion.

The four outflows can be linked for the most part to “anticipation of move in U.S. interest rates,” said EPFR’s Brandt, but “the intensity of concern keeps ratcheting downward.”

And given that many market players are not going to be around over the New Year, and will have to leave things in auto pilot mode, it’s understandable that they would pull back a little, Brandt said of investors.

Nevertheless, almost every bond fund group struggled to attract fresh money last week, including high yield and all regions. China bond funds posted consecutive weekly outflows in excess of $100 million for the first time in more than two years, and some wonder if the latest outflow will be the start of a crack in the foundation of the emerging market rally that has been building on synchronized global growth, recovery of commodity markets and other factors.

Among questions outstanding that could influence 2018’s outcomes are what happens with Venezuela, which has coupons overdue for more than half a dozen bonds, how China plans to change its credit allocation system, what will happen in geopolitical hotspots like North Korea and the Middle East, and what direction oil prices will take, as well as questions whether certain countries such as Nigeria will be able to service its debt, Brandt said.

South Africa bond funds saw a $10 million outflow last week, and the EMEA market credit is in the crosshairs of investor focus as the ruling African National Congress party prepares to choose a new leader and likely successor to current president Jacob Zuma. Many investors are in the corner of deputy president and businessman Cyril Ramaphosa to prevail in this tightly contested race.

© 2015 Prospect News.
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