Emerging market debt flat to weaker; Turkey moves lower on E.U. concerns

By Reshmi Basu

New York, June 21 - Emerging market debt was flat to softer Wednesday, as Turkish financial markets stumbled on worries over the country's commitment to strengthening its economy and how that will impact its effort to become a member of the European Union.

Turkey's tough session came despite a more upbeat tone to trading in U.S. equities and local equity markets, according to a market source.

However the country saw its financial markets unravel on worries surrounding the "E.U. anchor," and whether or not Turkey's current leadership can weather the economic and political maelstrom, noted a sellside source.

Additionally, the government has been dogged by speculation that it will relax inflation targets, a move which it denies planning, added the source.

"Noise over the country's current account deficit is getting loud. Then you have inflation.

"And on top of that, there's the Cyprus matter."

The E.U. has condemned Turkey's stance on Cyprus and many fear that the stalemate may result in the suspension of membership talks.

Since the emerging markets sell off in mid-May, the country has seen its spreads widen more on the fundamental story versus the risk reduction story, observed a source.

And on Wednesday, the poor performance in the country's local markets pushed the country's sovereign debt lower. The Turkish lira fell 2.7%

In the bond markets, Turkey was once again among the worst performers for the session, having earned that distinction the previous day as well.

At session's end, the country's portion of the JP Morgan EMBI Global index was down 1.13% while its spreads widened by 19 basis points to 278 basis points versus U.S. Treasuries.

During the session, the Turkish bond due 2012 lost 1.88 to 115.625 bid, 116.625 offered while the bond due 2030 gave up 1.75 to 137.25 bid, 137.75 offered.

Latin America hurt by Turkey concerns

Meanwhile Latin American local markets saw positive returns on the back of stronger U.S. equity markets. But that was not enough to offset the underlying worries over Turkey.

During the session, the Brazilian bond due 2040 shed 0.10 to 123.05 bid, 123.15 offered.

The Venezuelan bond due 2027 was down 0.20 to 118.90 bid, 119.30 offered.

Overall, the session was described as "bumpy," according to a trader, who added that the market was still "quite volatile."

Since May 11, emerging market debt has sold off on increased risk aversion, which has been triggered by concerns over global interest rates, commodity prices and worries over a potential U.S. economic slowdown.

And until there is some clarity to those stories, volatility will continue.

"But it's doubtful that we'll be able to make sense of this any time soon," the trader replied.

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