EM debt improves slightly amid ongoing volatility in broader markets; Ukraine spreads pull back in

By Rebecca Melvin

New York, Nov. 21 – Emerging markets debt was slightly better on Wednesday amid an uptick in oil prices and positive stock market action, although markets sold off into the market close in New York to end mixed to slightly better.

There was still improvement, which followed a very weak session on Tuesday when the market was dragged down by extended selling in U.S. stocks and a renewed downturn in oil prices.

U.S. financial markets will be closed on Thursday in observance of the Thanksgiving holiday, and bond markets will remain closed on Friday.

Ukraine’s sovereign debt curve was about 10 basis points tighter on Wednesday after blowing out the past several days. The sovereign was “battered,” with new issue spreads widening out about 60 bps during that time, a London-based market source said.

Also spreads for the Middle East and Africa region were “a bit better after a very weak session yesterday,” a second London-based market source said.

Volatility hits EM

Emerging markets debt has suffered losses in recent market volatility. But on Wednesday, the S&P 500 stock index tried to regain some ground, trading up 28 points, or 1.1%, at the highs to 2,669.93. The index closed up 8.04 points, or 0.3% to 2,649.93 as selling hit during the late afternoon as investors looked to the holiday on Thursday. That gain is on the back of a 1.8% drop to 2,641.89 on Tuesday, when the index turned negative for the year. And the index remains down 3.0% for the month. On Nov. 1, it closed around 2,740.37 and then ran up to a 2,813.89 close on Nov. 7.

For the rest of 2018, EM debt investors are expected to remain cautious. “The risk in the short term: EM sovereign and quasi-sovereign yields are expected to widen quickly should a deterioration of U.S. corporate credit take place,” a note published by Banco BNP Paribas Brasil SA stated on Wednesday.

“While we believe that EMs do not show an impending systemic risk, we are not calling for a blind bullish stance. Rather we argue that Argentina and, to a lesser extent, Turkey, plus the health of the U.S. corporate credit sector, justify a more tactical, less aggressive strategy in the short term,” the BNP Paribas note, titled “EM sovereign risk: Growing uneasy with US Corporate HY,” stated.

Oil prices ended up $1.04, or nearly 2%, to $54.49 for the front month contract of West Texas Intermediate crude on the New York Mercantile Exchange. Petroleos Mexicanos SAB de CV’s 6½% notes due 2027 edged back up to close around 92.875, which was up a point on the day, according to Trace data. Pemex’s 6¾% notes due 2047 were last trading higher at 85.3 which was up from 82 on Tuesday.

Meanwhile, Brazil’s Petroleo Brasileiro SA bonds were flat to higher, with the Petrobras 8¾% bonds due 2026 actively trading flat to slightly higher at 112.625, Trace data reported.

© 2015 Prospect News.
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