Morning Commentary: EM remains volatile; Lat-Am firm but subdued; oil, Yellen stay focus of market

By Christine Van Dusen

Atlanta, Feb. 10 – Bonds from Latin America were firmer at the open on Wednesday, but volumes were subdued as conditions remained volatile for emerging markets assets ahead of testimony from Federal Reserve chairman Janet Yellen.

“With many countries in Asia on holidays, all eyes will go to Washington this week,” a trader said.

Investors are also keeping an eye on oil prices “amid further signs of a global rut,” he said. “Comments from Iran’s oil minister late yesterday, stating that the Islamic Republic is ready to discuss with Saudi Arabia on oil market conditions, will unlikely provide room for sustained gains.”

At the open, EM paper was experiencing a small bounce, another trader said, and selling was tame.

“So maybe today we see the spread to corporates close the gap we have seen open up over the last few sessions,” he said.

Brazil-based Petroleo Brasileiro SA, Vale SA and Mexico’s Cemex SAB de CV firmed up, but “we are still trading very sloppily,” a New York-based trader said. “Volatility will remain firmly entrenched in our universe, as there are plenty of catalysts to support it, as we continue to outperform U.S. high-grade and high-yield.”

Said another trader: “Market liquidity has made sitting on your hands a national pastime for EM investors,” a trader said. It is “not always a bad thing, but it makes for a frustrating market to be in.”

Chile’s Corporacion Nacional del Cobre de Chile (Codelco) continued to trade within a 15-basis point range.

“Does it feel like there is massive conviction either way? No,” another trader said. “But it's still early, so who knows? One thing’s for sure: I don't expect EM issuance this week now.”

Egypt on deck

One trader was taking a closer look at Egypt’s plans for issuing notes by the end of the year.

The prime minister on Tuesday said that the sovereign will likely tap the markets in the second quarter.

“The Arab Republic initially intended issuing a second eurobond last year after a $1.5 billion transaction in June with a maturity in 2025,” the trader said. “Those bonds have underperformed versus their 2020 and 2040 siblings this year so far.”

Ghana to refinance debt

In other news from Africa, the proceeds from Ghana’s upcoming debt sale, which could happen as soon as June, will be used for refinancing debt, a strategist said.

“Despite assurance from the Ministry of Finance and comments from the IMF, Ghana’s 2026s and 2030s have fallen by circa 15 points since the start of the year, making them the worst performers on the continent,” he said.

Looking to Pakistan, bonds remained under pressure as the market headed into mid-week, but the 2019s still saw some demand from local investors, a trader said.

“Curve steepness is just a result of the current flow dynamic,” he said. “The 2024s now are at z-spread plus 680 bps. This is the all-time wide, and given how the credit has improved dramatically over the past few years, I think there is some value on offer down here.”

Liquidity remains an issue, he said, but “you're being paid for it, and it's probably one of the cheapest oil importers in EM at the moment. Inflation is falling, which should be supportive for a growth-friendly central bank policy.”

Ukraine, Russia ‘feud’ eyed

From Ukraine, the sovereign continued its “feud” with Russia over the $3 billion eurobond that was due in December of 2015, a trader said.

“The German Finance Ministry, which acts as a mediator, has asked Ukraine to revise and improve its offer,” he said. “Both sides still seem to be working on an out-of-court settlement, as Russia has not filed a lawsuit so far.”

The International Monetary Fund has revised its lending-to-arrears policy, he said, “but still requires Ukraine to negotiate in good faith. Russia, however, rejected the latest offer, saying that the conditions were worse than those offered to other investors.”

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