Emerging market debt sees pressure on political, commodity worries; dips after Fed meeting

By Reshmi Basu and Paul A. Harris

New York, Sept. 20 - Emerging market debt saw a poor performance Wednesday on the back of local political noise and declining commodity prices, even as the spillover effect from Thailand's military coup looked to be contained.

Emerging market debt saw muted trading earlier in the session Wednesday as investors watched events unfold in Thailand. However in the afternoon, bond prices were lower following the announcement by the Federal Open Market Committee, in which the central bank kept borrowing rates unchanged.

While that Fed's move was expected, some investors were disappointed that the statement accompanying the decision was not more dovish. As a result, U.S. Treasuries erased some earlier gains, triggering some selling across Latin America.

Some sources blamed the pressure on a bout of profit-taking as investors cashed out on historically tight levels.

In the previous session, emerging market debt as well as global financial markets eased on reports that Thailand's military launched a successful coup against the country's prime minister Thaksin Shinawatra. The news added more uncertainty to a market that has already been somewhat rattled by political troubles in Ecuador and Hungary.

However on Wednesday, once it was established that the Thai takeover was without bloodshed, the spillover was contained, according to market sources.

Asian markets saw more stability after seeing a volatile session the day before, in which the Philippines and Vietnam underperformed the market.

In trading, the Philippines bonds due 2031 gained 0.25 to 103.875 bid, 104.125 offered. The Vietnam bond due 2016 was unchanged at 103.75 bid, 104.25 offered.

Meanwhile Thailand closed its stock market Wednesday. But the country still saw pressure as the Thai baht declined sharply. External bonds also saw wider spreads. During the session, the Thai bond due 2007 saw its spread kick out by nine basis points.

No contagion impact in Latin America

Prior to the backup in the Treasury market, Latin America was mostly at a standstill as the coup in Thailand lacked violence.

"Truth is, not much has changed since yesterday [Tuesday]," observed a market source, who added that Brazilian corporates took a minor beating earlier in the session but then mostly bounced back.

He noted that the Braskem bonds due 2014 and 2015 were weaker on heels of the new 8% bond due 2017, which priced Tuesday to yield 8 1/8%.

"Unless the [Thai] king makes some outlandish announcements regarding the future, the bloodless coup [is] having little lasting effect on the markets," he added.

Instead it was the FOMC that had a greater impact on the asset class as sovereigns tracked Treasuries lower.

"Both U.S. markets seem like [they] may have bounced back today [Wednesday], but Latam sovereigns remain under a little pressure. Nothing wild though," the source noted.

During the session, Latin America was down. At 2.45 p.m. E.T., sovereigns were spotted at their lows of the day.

Furthermore, there was a fresh political scandal out of Brazil. The country's Supreme Electoral Court said it has opened a probe into whether president Luiz Inacio Lula da Silva played a role in an alleged scheme to purchase documents meant to discredit the opposition party. The news broke a couple of weeks before the Oct. 1 presidential election.

In trading, the bellwether Brazilian bond due 2040 fell 0.35 to 129.85 bid, 129.95 offered.

The Argentinean discount bond due 2033 slipped 0.70 to 96.45 bid, 96.60 offered.

Fitch places Thailand on watch negative

On Tuesday, Fitch Ratings placed Thailand on rating watch negative.

The credit was put on watch as the ratings agency waits "to see how things shake out" amid a dynamic situation, according to Roger Scher, Fitch analyst.

"The government has pretty strong foreign exchange reserve position against any pressures that could come from a result of this," he said.

While the country's markets were closed Wednesday, it will be telling as to whether there are any capital outflows. It is unlikely that such an occurrence will happen, given that people are taking the news in stride.

But in events of this kind there is a risk of uncertainty and capital flight, he warned.

In the near term, the ratings agency will look at such factors as the agenda of the new regime, the timetable for new elections, and if there is any type of opposition.

"We're starting to see some of these answers take form today, but it's just 24 hours or less since it started."

Scher noted that developments on the political front could affect the country's growth prospects as well as the business environment. The agency will also be looking to see if there is any fallout as the country faces mounting criticism from members of the international community, including the United States.

"Thailand is growing by about 4½% a year, which is okay. In the Asian context, it's not great but in the emerging markets context, it's not so bad," he said, noting that the rate of growth is about medium for triple B countries.

Fitch rates Thailand's foreign currency rating at BBB+ and the local currency rating at A.

After market close Tuesday, Standard & Poor's put the credit rating on negative watch.

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