Emerging market debt sinks as risk aversion rises; commodity prices fall

By Reshmi Basu and Paul A. Harris

New York, May 15 - Emerging market debt fizzled for the third straight session Monday, as investors unloaded positions on the back of poor performances in core markets.

Declines in local rates and foreign exchange made for an "ugly" session, noted a trader.

Furthermore, the commodity story, which has been credited for insulating Latin America from U.S. Treasury volatility, came under pressure. Oil prices and precious metals saw a sharp decline, which unnerved investors, according to a market source.

Oil prices slid 3%, falling below $70 per barrel to close at $69.41 on the back of decreased demand and inflationary pressure.

By mid-morning Monday, emerging markets was getting hit hard, according to a sellside source.

"The spread levels still don't look all that bad," noted the source. "If you step back a bit they are just a little more rational than they were before."

The source added local markets and local currencies saw the biggest moves.

"Local currencies have gotten walloped over the last few days and weeks."

Another market source surmised that the sell-off in the Brazilian real was overdone. But the currency could be exposed to more pressure if the central bank continues to intervene. Meanwhile the Turkish lira was down by as much as 5% at one point during the day.

EMBI+ widens

By mid-morning, the JP Morgan EMBI+ index widened by nine basis points to 195 basis points versus Treasuries, after kicking out by seven basis points on Friday. At session's close, the EMBI Global Diversified index was down 0.54%.

Argentina, Ecuador and Turkey were amongst the worst performers Monday. Spreads for Argentina moved out by 26 basis points. Ecuador and Turkey widened by 19 basis points and 18 basis points, respectively.

During the session, the bellwether Brazilian bond due 2040 shed 1.60 to 124.25 bid, 124.35 offered. The Argentinean discount bond due 2033 lost 2.25 to 93.80 bid, 94 offered. The Colombian bond due 2012 gave up 0.85 to 115.10 bid, 115.75 offered. And the Venezuelan bond due 2027 lost 1.70 to 121 bid, 121.50 offered.

Flight to quality

Emerging markets have had a tremendous run, but there is a flight to quality, triggered by concerns over inflation and the weakness in the U.S dollar, according to a buyside source,

The source added that the dollar is "getting hammered" owing to an assumption that the Federal Reserve may nearing the end of the two-year old interest rate tightening cycle.

"It may just be a pause," the buyside source said. "But right now the currency markets are assuming it's the end of the tightening cycle."

The source noted that the forces holding the dollar up have been a strong stock market and a strong U.S. economy. The U.S. fiscal position has been weak, the source added, citing a bad current accounts deficit and a dismal trade deficit. But tightening interest rates have served to counterbalance that, and have supported the dollar.

"Now that might not be there anymore," the buyside source observed.

JPMorgan: Marketweight for Turkey

In other news, JP Morgan recommended that investors should reduce their exposure to Turkey in the face of increased volatility. The firm cut its recommendation to marketweight from overweight, in a report obtained by Prospect News.

Even though the spread on the Turkish bond due 2030 has kicked out by 39 basis points to 233 basis points versus Treasuries since May 1, the sovereign is still trading near its all-time record tight of 212 basis points, the report noted. But the country is vulnerable to the changing composition of the global market, given its whopping current account deficit and financing needs.

The country plans to sell another $3.1 billion this year. So far, Turkey has sold $2.4 billion in the external markets.

JP Morgan reaffirmed Brazil's marketweight position.

Elsewhere, Tunisia's government said it plans to pre-pay $1.56 billion of its external debt. Two-thirds of the proceeds will come from the Tunisie Telecom privatization sale to Dubai's Tecom.

© 2015 Prospect News.
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