Emerging market debt tracks equities lower; Hungary sinks on ratings cut

By Reshmi Basu

New York, June 16 - Emerging market debt snapped a two-day rally Friday, ending a week of up and down trading with another lower session as the asset class continued to track global equities.

U.S. stocks lost momentum Friday, putting a kibosh on two straight days of solid returns. That brief relief rally came amid a month and a half of selling pressure as investors' risk aversion ratcheted up on inflationary jitters in the United States.

At session's end, the Dow Jones Industrial Average closed down 0.64 to 11,015.55.

And with equities trading in the red, emerging market debt saw positions unwind.

"The [EM] rally was short-lived," said a trader.

During the session, the benchmark Brazilian bond due 2040 gave up 0.35 to 123.65 bid, 123.75 offered. The Argentinean discount bond due 2033 lost 0.90 to 93.75 bid, 94.10 offered. The Turkish bond due 2030 shed 0.63 to 140.75 bid, 141.25 offered. And the Venezuelan bond due 2027 was down 0.35 to 119.50 bid, 119.90 offered.

Hungary lower on S&P downgrade

In other news, Hungarian bonds traded lower after Standard & Poor's cut its debt rating to BBB+ from A, citing concerns over the government's plan to lower the country's budget deficit.

In late trading, the Hungarian bond due 2015 was spotted down 0.18 to 92.02 bid, 92.67 offered.

No conviction in market

Sources have noted that the market has been trading with zero conviction. However, some of that conviction will return once the uncertainties related to the U.S. inflation and growth picture are cleared up, according to a market source.

Another source added that this week's whipsaw trading shows not only how temperamental the market is, but also that despite better valuations investors are "very risk averse."

"No one wants to be the first one to get their feet wet," noted the source.

And the strategy of buying on dips does not apply in this environment because the market will most likely see further volatility ahead, the source observed.

Rallies will be followed by bouts of profit-taking, noted sources.

Nonetheless, over the last month, the external debt market has been somewhat stoic in comparison to local markets amid the current turbulence. Emerging market debt has lagged the downturn in local markets. External debt technicals have limited the downside risk. And the U.S. growth story is not anticipated to disappear anytime soon.

Meanwhile emerging market debt is expected to outperform local equity markets as position overhang remains in equities, according to an analyst's note.

The analyst added that debt positions are near historic lows with high beta names seeing the blunt of unwinding of positions. But despite the sell-off, strategic inflows have surpassed $11 billion already this year.

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