Italian vote hurts emerging Europe sentiment; rating news benefits South Africa, Poland bonds

By Christine Van Dusen

Atlanta, Dec. 5 – Sentiment among emerging markets investors suffered slightly on Monday after voters in Italy rejected a referendum on constitutional reform.

Though the news didn’t ding stocks much, bonds from emerging Europe seemed a little bit more vulnerable, a market source said.

The referendum was designed to boost the economy and accelerate the government’s ability to make decisions. Italian Prime Minister Matteo Renzi has said he will resign.

“The failure of Italy’s referendum on constitutional reform may destabilize the European market today amid forthcoming political turmoil and growing uncertainty over the future economic policy in the country and even its membership in the European Union,” according to a report from Schildershoven Finance BV. “We are likely to see a risk off dynamics today, coupled with the mixed United States labor market statistics.”

In other news on Monday, South Africa retained its investment-grade rating, which boosted the mood among investors.

The sovereign’s debt rating from S&P was unchanged at BBB-, one level above junk, and the outlook was left at negative.

And Poland saw its outlook from S&P move to stable from negative, “a positive factor for the Polish bonds, as investors are very concerned about the economic policy of the government,” Schildershoven said.

Looking to Latin America, trading was slow on Monday after Sunday’s anti-corruption protests in Brazil.

“Market activities remain ... low as investors are undecided regarding the future oil price trend and the possible political risks in Brazil,” the report said. “Sunday’s protests in Brazil are not dangerous for reforms implementation.”

Odebrecht execs get leniency

In other news from the region, Brazil-based Odebrecht SA’s executives were given a leniency agreement by prosecutors, which supported bond prices.

“Initially, the company’s executives resisted from presenting evidence against the Brazilian policymakers,” the report said. “According to the latest available information, testimony will be presented during this week. A possible announcement will include documents, e-mails and other evidence. It is expected that a huge amount of policymakers may be involved in this investigation. Currently, it is the main risk for the country’s capital market performance.”

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