Bahrain, Oman spreads wider; tone weaker; LatAm back on its heels amid tariff uncertainty

By Rebecca Melvin

New York, March 2 – Emerging markets were weaker on Friday, with spreads wider across the board in the Middle East and Africa region, as rates wavered then popped higher at the end of the European session.

“A weaker macro picture plus a [dollar] chart that just maybe has double bottomed for the near term are weighing on the market,” a London-based trader said. “March so far is starting and feeling more like February than January at this stage.”

The emerging markets in February weakened compared to a strong January with record high issuance.

In the Middle East, Bahrain’s bond spreads were wider with the Bahrain 2047 notes quoted at about 94¼ at the midpoint and a spread about 10 basis points wider on the week. Fitch downgraded the sovereign’s foreign-currency issuer rating to BB- from BB+ on Thursday, citing lack of a clear strategy in the medium term to tackle high deficits.

Oman was also sharply lower, with spreads wider by 10 to 13 bps, the London-based trader said. Egypt and Africa were also weaker.

‘Change of paradigm’

Mexico’s bonds fell but stabilized on Friday, with the whole Latin America region seeming to regain its footing but with a weaker tone as debt capital market players accessed the potential impact of President Donald Trump’s controversial plan to impose global tariffs on aluminum and steel.

Talk of tariffs and trade war threw renegotiation of the North America Free Trade Agreement up in the air, a New York-based sellside source told Prospect News.

“It’s more likely that [NAFTA] won’t get done. It’s not the highest probability, but it’s more likely,” the source said. Tariffs and even talk of tariffs is going to affect a region that is particularly driven by exports of commodities, the source said.

But a second New York-based market source said that while on the margin some connection may be drawn from the comments to the NAFTA negotiation process, Mexican spreads had not yet been affected by the chatter.

Two of the biggest countries that sell steel to the United States are Canada and Mexico. China, which has been called out as a bad actor in trade, is well down the list of suppliers of steel and aluminum.

“Canada is the largest exporter of aluminum and steel to the U.S; Mexico is fourth and Brazil is in there,” a source said.

The uncertainty created by Trump’s proposal is expected to put a crimp in what some were hoping would be a reset for the Latin America debt primary market. After a hiatus in the new issue market of about two weeks, Paraguay announced a new deal on Thursday and other issuers were expected to follow its lead. But now issuers were expected to remain on the sidelines at least for the next week or so.

“Paraguay might go regardless; but I’m sure that it’s going to be a couple of weeks, which brings us closer to earnings” before the market gets going again. If stuff was planned for next week, we probably won’t see it,” a market source said.

Paraguay announced on Thursday a potential $500 million transaction that was expected to roadshow starting Tuesday.

For the region, Trump’s proposal and follow up tweets represent a change of paradigm. Early Friday Trump tweeted, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good.”

“This is a rewriting of the post-World War era, and creates volatility because we don’t know what is going to happen,” the market source said. “Although there was a stabilization of pricing and it looked to be hovering right around previous levels, there was still uncertainty because we have to know what is actually changing.”

Trump announced his intention to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports, in a bid to level the trade playing field as well as strengthen U.S. industries deemed integral to national security.

The move comes on the heels of studies by the Commerce Department that found imports of metals had compromised the country’s ability to make its own weaponry. The plan was met with harsh criticism on a number of fronts including many U.S. manufacturers and trade partners including Japan and the European Union. But it was praised by congressional Democrats and labor unions.

Financial markets were initially rattled, but both U.S. stocks and Treasury yields recovered on Friday.

The S&P 500 stock index rose 13.58 points, or 0.5%, to 2,691.25 after losing 36.16 points on Thursday, and the Nasdaq Stock Market recouped 77.31 points, or 1.1% to 7,257.87 after a 93.45 point drop on Thursday. But the Dow Jones industrial average lost 70.92 points, or 0.3%, to 24,538.06 after a tumble of 420 points on Thursday. The yield on the U.S. Treasury 10-year benchmark moved back up to 2.862% on Thursday from 2.802% on Wednesday.

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