Surprise Brexit decision hurts risk sentiment; EM wider, but buying opportunities could arise

By Christine Van Dusen

Atlanta, June 24 – Emerging markets credit default swaps spreads were substantially weaker and credit was wider on light-volume Friday morning on the surprising news that the United Kingdom voted to leave the European Union.

“Following the results of the referendum, markets are naturally in a risk-off mode,” a London-based strategist said. “Generally, we expect [most of emerging markets] to remain fairly insulated, but the surprise outcome does affect overall sentiment.”

Said a trader, “Lots of uncertainty, so we’re seeing the usual flight to quality.”

However, given that emerging markets bonds were performing well before the Brexit vote, many bonds seemed rich, the strategist said.

“From an investors’ standpoint, today’s event could result in buying opportunities once the dust settles down,” he said. “Needless to say, much will likely depend on central bank actions and political reassurances to calm down markets in the foreseeable period.”

Latin American bonds on Friday morning gave back the day’s previous day’s gains – and then some, a New York-based trader said.

“Performance is also bond- or curve-specific,” he said. “Inquiry and volumes are light overall, with dealers tiptoeing around the Street here and there as they do price discovery.”

Mexico-based Cemex SAB de CV moved lower, returning to levels seem late last week and before, he said.

“No distinct movement either way, in terms of client inquiry; it’s been pretty even and light,” he said.

Lat-Am finishes off wides

At the end of the day, Latin American credit was wider but off the wides of the day, another trader said.

“The widest levels were hit at the New York open, and the market did see a considerable bounce, but losses began to mount later on in the afternoon as equities and oil slid to intraday lows,” he said.

Brazil’s five-year credit default swaps spreads closed at 341 basis points from 320 bps, while Mexico’s moved to 182 bps from 159 bps.

“Cash prices stay unchanged and, in some cases, are actually higher as the relentless Treasury rally helps to support levels in the face of spread widening,” he said. “Latin American high yield finishes mixed on the session, with Venezuela outperforming, whereas Argentina is soft.”

Venezuela names decline

PDVSA’s 2017s closed at 71.25 from 72, while Venezuela’s 2027s finished at 49 from 48.50.

Argentina’s Bonar 2024s ended at 113.75 from 115, and the 2026 went out at 107.25 from 108.75, the New York trader said.

“Flows surprisingly light for such a volatile session, with scrappy two-way inquiry, from what we saw,” he said. “Markets were certainly caught offside with Brexit, and the question remains as to whether this will simply be a temporary knee-jerk reaction lower or if this negative tone may be the start of a new trend of wider spreads ... and overall weakness in risk assets.”

Turkey widens

From Turkey, credit default swaps spreads widened about 52 bps on Friday morning, a London-based trader said.

“The cash curve moves lock-step, but actual flow seen was Street rather than clients,” he said. “In fact, given the move in United States Treasuries, the cash price moves were rather limited.”

Long-dated bonds from Turkey moved 3 points while bonds from the belly of the curve moved about 1½.

Spreads settle

As the morning went on, Turkey’s widening calmed a bit, another trader said.

“The unexpected happened, and we started super-weak,” another trader said. “Without the panic selling from clients the Street took us from 50 bps wider to only 35 bps, where we have settled.”

Banks and corporates from Turkey traded well, he said, with buyers adding on the widening.

“I guess the severity of the move is 65% U.S. Treasury-driven, but we were also trading at the tights, which didn't help the gap down,” he said. “Overall flows remain better buyers for choice, but it’s hard to read into, given the nature of what’s happened and we are at the end of a week.”

Yunnan Metropolitan roadshow

In deal-related news, China’s Yunnan Metropolitan Construction Investment Group Co. Ltd. set out on Thursday for a roadshow to market a dollar-denominated issue of notes, a market source said.

Citigroup and Guotai Junan International are the joint global coordinators and – with BOC International and Orient Securities – joint bookrunners and joint lead managers for the Regulation S deal.

The roadshow is being held in Hong Kong, Singapore and London.

The issuer is a developer and builder in Yunnan Province and based in Kunming.

© 2015 Prospect News.
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