Emerging market debt dragged down by multiple negatives; flight to quality

By Reshmi Basu and Paul A. Harris

New York, April 15 - Emerging market debt was battered by a myriad of factors Friday, including a rout in equities and the auto sector's woes, prompting a flight to quality.

Risk aversion is back in the market, as the downturn in the U.S. corporate sector is casting a shadow on emerging markets, said a source.

"It's been odd," said a trader in describing Friday's market action. He said trading volume was decent with the usual cast of players such as real money and hedge funds.

"The market started weak and then all of a sudden we had a turnaround with [U.S] Treasuries," remarked the trader.

Trading was up. But then nearing the end of the session, prices began to fall again, he said.

"We hit a high of 112.20 on [Brazil] '40s and now we are trading at 110.60."

"It opened up very weak because GM opened up weak and people were spooked. We improved with" the rise in Treasury prices, remarked the trader.

"All of sudden, people were back into bonds. Towards the end of the day, everyone was getting rid of risk. The market just started melting on the close."

For instance, at 3 p.m. ET, the Brazil C bond was spotted at 98.437 bid. At session's end, the bond was bid at 981/4, down one point on the day.

Treasuries rallied Friday to their lowest yield in almost two months in response to more negative economic data in the United States, which has raised speculation that the Federal Reserve may take a breather from future rate hikes.

A soft manufacturing report from the New York Federal Reserve coupled with a fall in consumer confidence raised speculation of slower economic growth in the United States.

The yield on the 10-year note closed at 4.26%, down from 4.36% at Thursday's close.

EM down

But the Treasuries rally was unable to keep emerging markets from bleeding. The Russia bond due 2030 fell 0.32 to 103.93 bid. The Venezuela bond due 2027 slid 1 ¼ to 97.30 bid.

The Ecuador bond due 2030 took a three-point dive to 85 bid on political noise, said a market source.

Ecuador's government denied reports Friday that it was planning to dismiss congress. The country's debt was shaken after former president Abdala Bucaram called on the government to dissolve congress, saying it was the only way to end the stranglehold over control in the country's Supreme Court.

In the coming sessions, the trader expects to see more of the downtrend across emerging markets.

Flight to quality

"It was very difficult day across the board," said a Latin America debt strategist for Refco EM.

"You've seen a meltdown in the equity market in the U.S. that has increased the uncertainty and pushed investors to look for flight to quality in Treasuries," he said.

The Dow Jones Industrial Average fell 191.24 points in the session, posting its largest drop since March 2003. In three days, the index has fallen more than 400 points.

The strategist added that it is not only the U.S. equities market that has slumped. Emerging markets have felt the blow.

"The local market has been also under pressure. The Mexican and the Brazilian are both lower," he commented.

The strategist added that there were a myriad of drivers fueling the downtrend such as the high cost of oil, troubles at General Motors and Ford, the large trade deficit in the United States as well as Friday's consumer sentiment report.

© 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.