Selling hits Middle East sovereigns, Qatar banks as tensions rise; Venezuela, PDVSA weaker

By Rebecca Melvin

New York, June 5 – The Middle East was a focus of emerging markets credit on Monday after news that Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic ties with Qatar, accusing Qatar of backing terrorism and meddling in their internal affairs.

The four Arab nations said they also would cut off certain commercial ties with Qatar, barring its aircraft and vessels from using their airspace and territorial waters. They didn’t indicate that they would restrict Qatar’s shipping or air links to other countries, however.

The development came on the heels of another terrorist attack in London on Saturday that left seven people dead and which marked the third attack in the United Kingdom by Islamic extremists in as many months.

The news represents “a serious escalation of ongoing simmering between Qatar and the Saudi-led coalition,” a London-based trader said.

Among sovereign debts, there was “a clear flattening of Qatar” on the day, but Oman and Dubai “definitely held in well and, in fact, saw net adding,” the trader said.

Qatari banks sustained the biggest hit, including Qatar Insurance Co. and Ezdan Holding Group, the trader said, adding that there was likely to be follow-through reaction saved for Tuesday given that there “were a few holidays in Europe” on Monday.

Qatar is a member of the Organization of Petroleum Exporting Countries, accounting for only about 2% of OPEC’s output. But it is also the world’s largest exporter of liquefied natural gas.

U.S. and Brent crude oil prices moved up initially in Asian markets but settled lower. West Texas Intermediate crude for July delivery closed down 27 cents, or 0.6%, at $47.39 a barrel on the New York Mercantile Exchange.

“The Asian selling save for a couple of contrarians was pretty solid,” the trader said.

Among Qatar’s sovereign issues, the 2.099% bonds due 2018 were indicated at par bid, 100.08 offered, and the Qatar 3¼% bonds due 2026 were at 99.12 bid, 99.62 offered, according to a market source.

Venezuela weaker

In Latin America, Venezuela and PDVSA (Petroleos de Venezuela SA) bonds were weaker. Whether the widening was due to the Middle East tensions or the South American country’s internal struggles was unclear.

The oil producer’s bonds typically react to moves in oil price, but “the pressure and protests are constant,” and there is considerable uncertainty whether the current president is going to be able to maintain control of his administration,” a New York-based market source said.

Venezuela and PDVSA bonds were in by about ½ point, and spreads widened by about 25 basis points, sources said.

“It’s a high-beta name, and it’s going to swing. It’s not trading on fundamentals,” the source said.

PDVSA’s 8½% bonds due in November were quoted at 91 bid, 91½ offered, yielding 33%.

“They are trading like they are going to be repaid. It’s a great [bond] for someone who can withstand the coin toss for five months,” the source added.

Mexico leans positive

With the result of the State of Mexico gubernatorial elections – and two other state elections – falling in line with the Institutional Revolutionary Party (PRI) ruling party, investors felt confident on Monday to lift that country’s sovereign debt by about 7 or 8 bps, a New York-based trader said.

PRI candidate Alfredo del Mazo eked out a win over Delfina Gomex of the National Regeneration Movement (Morena) on Sunday.

Mexico’s 4.15% bonds due 2027 were indicated at 103.7 bid, 104 offered.

But the margin of victory was by less than 2% - closer than it has ever been – so the results leave open the possibility that Morena may be a significant factor in next year’s national elections in Mexico, a New York-based market source said. “We’ll have to stay tuned.”

Meanwhile, other positive developments have lifted sentiment for Mexico credit, including a softening of President Donald Trump’s rhetoric against Mexico and following his administration giving notice to Congress last month approving renegotiation of the North American Free Trade Agreement.

In addition, Mexico’s economic outlook continues to surprise. Stronger than anticipated data caused Natixis to lift its forecast for Mexico’s GDP for 2017 to 2% from 1.2%, according to Natixis’ Latam Macro Wire published May 16.

Asia deals added to calendar

At least three new deals were proposed in Asia including South Korea’s GS Caltex Corp., which is offering dollar-denominated five-year notes; China Molybdenum Co. Ltd., which is proposing to issue up to RMB 8 billion of corporate bonds with a term of up to eight years; and China Merchants Bank Co. Ltd., which announced a $5 billion medium-term note program.

© 2015 Prospect News.
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