Morning Commentary: Market decline keeps EM assets weak; bonds from Asia, Lat-Am see selling

By Christine Van Dusen

Atlanta, Aug. 24 – Risky assets, particularly those from Asia, remained weak on Monday as stocks and commodities continued to plummet on concerns about China's economy.

“Asian credits sold off, with investment-grade cash closing the day 5 basis points to 15 bps wider,” a London-based trader said. “We started the day 5 bps wider, and the sell-off [worsened] as the Shanghai composite went from [being down] 3% to end the day down 8½%.”

Technology names from China were 10 bps to 20 bps wider while Korea’s bonds moved out between 5 bps and 8 bps, he said.

“But we're not seeing any panic selling with the provocations out of North Korea,” he said.

Spreads from India were between 5 bps and 10 bps wider amid “very thin” liquidity, he said.

“Malaysia was mixed, with the Malaysia curve 5 bps wider,” he said.

Petroliam Nasional Bhd. (Petronas) saw its curve widen by 10 bps, he said.

Looking to Turkey, the curve was between 15 bps and 18 bps wider, in line with the moves of the larger market, another trader said. But the sovereign hasn't been hit as hard as those in Asia.

“There has been more underperformance, for example, in the Indonesia curve, with its closer proximity to China,” he said.

Bank and corporate paper from Turkey underperformed, he said.

“They were too tight to the sovereign, and the Street is now trying to push paper to the wides versus the sovereign,” he said. “Subordinate bank paper is underperforming once again, trading at new wides versus seniors.”

From Latin America, bonds moved wider and lower “as the pain from last week carries over into this morning,” a New York-based trader said. “Liquidity is the primary concern, as cash prices are difficult to navigate, with few prints at all in the early going.”

Most of the inquiries were for bids, another New York trader said, but volumes remained relatively small.

“Hopefully it does not turn into a liquidation sell-off,” he said. “But I have seldom seen a sell-off of this kind, with such relatively small selling volumes and so little screen trading.”

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