EM rallies as investors await FOMC meetings; South Africa rebounds; Colombia underperforms

By Christine Van Dusen

Atlanta, Dec. 14 – Emerging markets assets experienced something of a relief rally on Monday, even with a continuing decline in oil prices, as investors awaited this week’s meetings of the Federal Open Market Committee.

Oil’s latest drop came on the news that Iran would increase exports of crude.

Also on Monday, investors were keeping an eye on South Africa after President Jacob Zuma made another appointment for finance minister. Zuma had initially fired Nhlanhla Nene and replaced him with David van Rooyen, which sent bond yields plunging and five-year credit default swaps spreads surging.

Then, on Sunday, Zuma dismissed van Rooyen in favor of Pravin Gordhan, who was finance minister for about five years, beginning in 2009.

“Bonds rebounded, so basically it’s back to where it was on Thursday morning,” a trader said.

All of this shuffling, though, has the market wary, a strategist said.

“The two replacements within only a few days are likely to keep investors wary about the risk of political interference and governance,” he said. “Some questions also arise on the standing and power of President Zuma within the African National Congress.”

Van Rooyen was a “dark horse,” according to a report from Schildershoven Finance BV.

“The market will positively react to the South African president decision to appoint a well known in the investment community person to the post of finance minister, instead of the one who was a ‘dark hose’ for almost everyone,” the report said. “However, [the] unstable position of the South African president may shake investors’ confidence and prevent returning prices to the levels they traded before.”

Brazil suffers but stays firm

Brazil traded lower as the currency suffered, but bonds were “surprisingly firm” and saw some small buying from Europe on Monday morning, a New York-based trader said.

Five-year credit default swaps spreads for the sovereign were about 3 basis points to 5 bps wider.

“Only bids are locals,” he said.

But late in the day, Brazil’s bonds improved, another trader said.

“Brazil is trading very well,” he said.

Pemex, Colombia trade

In other trading from Latin America, buyers emerged – briefly – for Mexico-based Petroleos Mexicanos SAB de CV’s long-dated bonds, a trader said.

“The market seemed to stabilize for a while, but dealers are too long,” he said. “Another wave of selling has ensued.”

Also on Monday, Colombia’s bonds underperformed.

Debt spreads for Brazil ended the day at 474 bps from 500 bps, and Mexico’s moved to 474 bps from 500 bps, a trader said.

“Cash prices continue to be under pressure but do a bit better into the close,” he said.

Short-dated bonds from Venezuela were weak while long-dated notes were mostly unchanged, with the sovereign’s 2027s staying put at 42.50. PDVSA’s 2017s, meanwhile, closed at 55 from 56.25.

Argentina moved “slightly higher,” he said.

“Flows today were on the balanced side, with not a whole lot of conviction seen either way,” he said.

Russia, Turkey still tense

Looking to Russia and Turkey, confrontations continued during the weekend, the strategist said.

“A Russian warship fired warning shots at a small Turkish fishing vessel after unsuccessfully warning the boat by radio and visually,” he said.

A Turkish official called the shots “reckless actions” that could bring “harmful consequences.”

Said the strategist, “The relationship between both countries has deteriorated sharply.”

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