Egypt-related risk aversion continues for EM as focus shifts to U.S. economy, euro zone

By Christine Van Dusen

Atlanta, Feb. 4 - As tensions continued to boil in Egypt on Friday - with a peaceful "Day of Departure" rally in Cairo's Tahrir Square marred by violent clashes on the city's side streets - emerging markets investors and issuers stayed mostly on the sidelines and turned their attentions to the United States and the euro zone.

"The protests against the [Egyptian] government have been building and the violence has intensified, leading to further spread volatility," said Gavan Nolan, analyst with Markit, in a report. "Whatever happens in Egypt today and over the weekend, the risk of contagion across the region is likely to be a major factor over the coming weeks."

The JPMorgan Emerging Markets Bond Index Plus widened by 1 basis point at the start of the day. "EM remains under pressure, particularly the EMEA USD-bloc, which has been hit by renewed nerves around Egypt," according to a report from RBC Capital Markets.

On Friday, however, the market focused primarily on mixed data from the United States and on the summit of E.U. leaders in Brussels.

"As the week draws to a close, the markets ... are putting Egypt to one side and focusing on two other factors: the U.S. economy and the euro zone debt crisis," Nolan said.

E.U., U.S. in focus

Friday saw E.U. leaders meeting to consider strategies for addressing the debt crisis, and sovereign spreads rallied in anticipation that significant steps will be taken to address the issue.

"Investors are aware that concrete measures probably won't be announced today; the E.U. has already said that this will come from the next meeting in late March," Nolan said.

Meanwhile, Treasury yields crept higher on the news that a disappointing 36,000 jobs were added in the U.S. during January and that the warehousing and transportation industries declined. At the same time, though, unemployment fell to 9% and the manufacturing industry saw gains.

"EM prices moved lower as the U.S. Treasury market was weaker," a New York-based trader said. "The market is trying to sort through payroll data and other market reactions."

Prices slide

Argentina's Boden 2015s were trading at 95 while the sovereign's discount peso bonds were seen at 43.85 and, later 43.70. Brazil's 2021s were trading at 101.50.

"What's going on with Treasury yields is creating at least some lateral pressure for EM credits to descend in price terms," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "It's very scattered, the price modifications. The long end of the core sovereign curves along the Latin American spectrum - Panama, Mexico - have seen markdowns. It's all very, very spotty."

The problems in Egypt haven't directly infected the Latin American markets, he said, though risk aversion certainly has swept through EM.

"What we've had is more of a tone of caution and wait-and-see as the events have been developing," he said. "Slowly things have been sort of moving laterally without really any large impacts on Latin America."

What might make things worse, he said, is if another bout of risk aversion hurts the commodities market in general and crude oil in particular.

Raghsa, Belarusbank on tap

Also on Friday, Argentina-based real estate developer Raghsa SA set guidance for its planned issue of up to $100 million fixed-rate notes due February 2017 at the 8½% area, a market source said.

JPMorgan and Banco Itau are the bookrunners for the Rule 144A and Regulation S offering, which is being marketed on a roadshow until Feb. 8.

The deal is expected to launch Feb. 9, and proceeds will be used for debt refinancing and working capital.

And Minsk-based lender OAO ASB Belarusbank is planning to issue dollar-denominated bonds worth up to $500 million, a market source said.

Issuance is likely to take place in the second quarter of the year.

Inflow streak ends

In other news, a seven-week streak of inflows into emerging markets bond funds ended this week, according to data tracker EPFR Global. The funds reported outflows of $26.4 million for the week ended Feb. 2.

Local currency EM bond funds, however, saw continued inflows.

"Inflows of $184 million into local currency funds were more than offset by redemptions from hard currency and blend funds," said Cameron Brandt, senior analyst with EPFR.

"I think it is getting harder to find value in better-quality emerging markets, especially given the inflationary and interest rate implications of the spike in oil prices and surge in food costs," he said. "So investors are staying on the sideline - there's been a noticeable tailing off in overall flow volumes since third-quarter 2010 - or rotating to the segment where they think there are still gains to be made."

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