Market softer ahead of jobs data; Brazil new issue rumor sparks sell-off; funds take in $131 million

By Reshmi Basu and Paul A. Harris

New York, Dec. 2 - Emerging market debt reversed fortunes Thursday, as investors shed paper from both Brazil and Russia a day ahead of U.S. non-farm payroll numbers.

Inflation concerns brought down the U.S Treasury market as it extended its losing streak to seven consecutive sessions of falling prices. The yield on the 10-year Treasury note stood at 4.41% at Thursday's close.

"It was a little bit softer this morning [Thursday] with Brazil being softer," said a buyside source.

"Looking at the prices, it looks kind of like a flipside of what happened yesterday [Wednesday]. Things that were up big yesterday [Wednesday] are down today [Thursday]. And things that were down yesterday [Wednesday] are flat."

Both Brazil and Russia, winners from Wednesday's session, traded down Thursday. The Brazil C bond lost 0.257 to 100.68 bid while the bond due 2040 fell 1.40 to 114.20 bid. The Russia bond due 2030 dropped 0.065 to 100.060 bid.

Also, oil producing countries felt the pinch as oil prices have come down to their lowest level in three months. Benchmark light sweet crude ended the session at $42.85 in New York.

The Venezuela bond due 2034 slipped 0.95 to 103 bid. And Wednesday's winner, Ecuador, slipped Thursday. Its bond due 2030 was down 2½ points to 84 bid.

Rumors of more Brazilian paper

Yet again, a rumor that Brazil could tap the market as soon as Friday surfaced.

"The rumor is they want to get it done before non-farm payrolls," said the buyside source.

"It's a rumor that spooked the market this morning and triggered a sell-off.

"I hope the rumor is true," he added.

Previously, there was speculation that Brazil would hit the market with a local currency deal.

"That did not pan out," he noted.

One market source added that rumors of a new Brazilian issuance have been around for a couple of weeks.

Inflows at $131 million

Emerging market bonds had inflows of $131 million in the week ending Dec. 1, according to EmergingPortfolio.com Fund Research.

This was the fifth week of inflows, in which a total of $598 million has entered the market.

Inflows are $883 million year-to-date, which is 5.52% of the funds' beginning-of-year total assets.

Global bond funds had inflows of $94 million in the week, extending the winning streak to eight weeks. These funds have had $7.9 billion of inflows year-to-date.

With five consecutive weeks of inflows, investors appear ready to play in emerging markets.

The tone is "cautiously bullish," said the buyside source, who holds a neutral position in emerging markets. With spreads so tight, investors are aware that something may snap.

"People are very cognizant of valuation. At the same, I don't think people are short. You can construct a decent argument for at least some relative value within emerging markets," he said.

One country that he still likes is Russia.

"I think as long as oil is reasonably priced, then Russia is going to do just fine. If oil is at $20, then I worry.

"As long as oil is north of $30," then all is good, said the buyside source.

Another country he likes is China.

"But there's no way to invest in it. Basically if you are buying oil or other commodities, you are making a bet on China," he noted.

Ukraine uncertainty continues

Ukraine awaits the decision by the Supreme Court on the legitimacy of the Nov. 21 contested presidential election, in which prime minister Viktor Yanukovych was declared the winner against opposition leader Viktor Yushchenko.

The European Parliament on Thursday issued a resolution that called for a run-off. Meanwhile Russian president Vladimir Putin dismissed the notion of another election.

"About three months ago, a lot of people were bullish on the Ukraine," said the buyside source.

"The big picture has been that they have solid macroeconomic policy, but the market is about two years ahead of itself.

"They [Ukraine] have basically adopted the Russian plan, but here they are - the bonds are basically trading on top of where Russia is. It doesn't make sense to me. I always avoided it," he commented.

The political story is unbelievable, he noted.

"To me, it created an opportunity to buy Russia on the cheap. Monday was a great day to buy Russia on the cheap, particularly combining Ukraine with Gazprom news."

Stories surfaced that Russia's natural gas monopoly Gazprom would make a bid for Yuganskneftegas, the main production subsidiary of embattled Yukos Oil Company.

"It's just a great story," he said.

But even as Ukraine paper has dipped, it is by no means a bargain, he observed.

"Even at these prices, I would not be enthusiastic about valuations in Ukraine. It is what it is."

For instance, Ukrainian bonds "are trading at a 7% yield - a B1 country - that's fair value," said the buyside source.

"And if the situation deteriorates, you are only going to lose money," he observed.

Furthermore, earlier this week, Ukraine's Central Bank implemented capital controls to stave off a bank run, forbidding commercial banks from making early deposit withdrawals and setting limits on withdrawals from cash machines.

"Never a good sign," commented the buyside source. "People are just very nervous. But 7% and change, the market is not that scared."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.