EM debt gets slow start; Oman under pressure; stocks reverse losses in first trading session of 2019

By Rebecca Melvin

New York, Jan. 2 – Emerging markets debt got off to a “slowish start” on the first trading day of the year on Wednesday. Financial markets were closed on Tuesday for New Year’s Day.

EM bonds struggled as a rally in U.S. Treasuries sent the yield on the benchmark 10-year note to 2.67%, a London-based market source pointed out. Meanwhile U.S. stocks and oil prices reversed early losses to end the day higher.

Light trading and a quiet primary market were expected to persist for the current holiday-shortened week, with market players looking ahead to Friday’s U.S. monthly payrolls report and more EM bond market activity starting next week.

In Wednesday’s market, Oman was under pressure along with some African sovereigns to start the year, the source said.

According to the state budget plan published on the Oman News Agency on Tuesday, the Omani government expects to raise this year 2.4 billion riyals, which is the equivalent to about $6.2 billion, to cover a budget shortfall.

Raising funds in the international bond market promises to be expensive especially after Fitch Ratings lowered its rating on the sovereign by a notch to below investment grade last month. The ratings agency said that fiscal deficits are leading to a sharp deterioration in Oman’s sovereign and external balance sheets.

Meanwhile, S&P Global Ratings has Oman’s sovereign ratings at BB/B with a stable outlook and Moody’s Investors Service has its rating at the lowest investment grade with a negative view.

Oman was last in the international debt market in January 2018 with a $6.5 billion three-tranche deal of notes. But further 2018 borrowing plans were not forthcoming despite expectations for about $1 billion more of issuance, as higher oil prices bolstered the country’s finances, and the strengthening U.S. dollar and concomitant EM currency crises sapped the EM debt market of vitality.

Oman’s 4¾% notes due 2026 were last down more than ½ point, or 0.64% at 85.37. The bond has sunk from about 95 in October.

Oman’s 5 3/8% notes due 2027 were not seen to be traded but were quoted last at 86.85 bid, 87.40 offered on Tuesday.

Oman’s 5 5/8% notes due 2028 notes stand at their lows at 97.10 bid, 88.0 offered for a yield of 7½%.

Weak economic data from China affected EM debt and the broader markets on Wednesday. The Asian country saw factory activity contract in December for the first time in 19 months as domestic and export orders continued to weaken, the Caixin/Markit Manufacturing Purchasing Managers’ index for December said.

The reading fell to 49.7 for December from 50.2 in November, marking the first contraction since May 2017.

The data corroborated China’s official PMI reading on Monday, which showed factory activity contracted for the first time in more than two years. The readings support the thesis that the economic powerhouse may be in for protracted weakening, a situation that would also weigh on the global economy.

The yuan was at 6.86 to the U.S. dollar, which was little changed on the day. However, the yuan lost 5.3% against the U.S. dollar in 2018 as a slowing China economy and trade problems with the United States undid a rise of 6.8% for the yuan in the year earlier.

The U.S. Labor Department’s December payrolls report is expected to reveal continuing strong U.S. employment, with the unemployment rate anticipated to tick lower to 3.6% from 3.7%, according to Wharton School Finance Professor Jeremy Siegel.

Siegel, speaking on CNBC on Wednesday, said that valuations for stocks are at attractive levels right now for investors to buy and that the U.S. Federal Reserve is unlikely to continue to lift interest rates if the 10-year Treasury yield remains below 3%.

© 2015 Prospect News.
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