Morning Commentary: EM firm ahead of FOMC; Brazil struggles; Nord Gold ‘overvalued’

By Christine Van Dusen

Atlanta, Dec. 16 – Emerging markets assets remained firm on Wednesday morning ahead of the Federal Open Market Committee’s announcement on an interest rate decision.

“With no doubt, the outcome has many implications for the EM space,” an emerging markets strategist said. “While a rate hike of 25 basis points is mostly priced in already, the further trajectory and also the reactions of EM central banks will be a main determinant in how markets will react, should the Fed go ahead.”

Spreads were “OK” during the morning, a trader said.

“We have seen real-money selling cash, pushing the cash-to-credit default swaps basis wider, but most real money can’t hedge rates so selling cash is their only way,” he said.

Turkey’s curve began to steepen on Wednesday morning, he said, continuing Tuesday’s trend.

“The 2025s and 2026s would be my choice of bonds,” he said. “Cash looks cheap to CDS here, as the Street is probably long of cash. One- to three-year bonds are for sale as everyone tries to avoid front-end exposure to rates.”

Flows for Turkish banks were balanced, he said, with some selling seen for five-year senior notes.

“Turkey corporates are seeing small selling from retail but the odd bid in better size from real money,” he said.

In other news from Turkey, Yasar Holding AS sold about 75% of its paint business to Toyo Ink America LLC.

That move should be seen as “credit-positive, but we await terms and proceeds to see the impact on leverage,” the trader said. “But this was not expected, so should come as a positive surprise to investors.”

Brazil in focus

Looking to Latin America, Brazil continued to “haunt the market,” a trader said.

“The big news overnight was that the Brazilian government set the primary surplus target at a band of 0% to ½% of gross domestic product, depending on tax revenue performance, potential recognition of debt to federal banks and other assorted items,” he said.

“With the country in recession, low commodity prices and government approval of a financial-transaction tax “uncertain at best,” he said, “it is clear where the risks to even compliance with that band lie.”

This, he said, “represents a major defeat for finance minister Levy,” he said, “and most likely will ensure his resignation.”

A downgrade from a ratings agency is also likely, he said.

Separately, Brazil’s Supreme Court was expected to decide on Wednesday the opening of impeachment procedures against President Dilma Roussef.

Nord Gold plans acquisition

Also on Wednesday, investors were paying attention to Nord Gold NV, a mining company with interests in Russia, Kazakhstan, Burkina Faso and Guinea. The company is planning to buy the remaining shares of Northquest Ltd. Co.

The deal should not impact the company’s eurobonds, according to a report from Schildershoven BV, but Nord Gold’s eurobond “is overvalued” compared to Russia-based Polyus Gold International’s bond.

South Africa rating affirmed

South Africa remained on radar screens on Wednesday after Moody’s Investors Service affirmed the sovereign’s Baa2 rating but changed the outlook from stable to negative.

The ratings agency adjusted the outlook because South Africa’s growth is likely to remain low as a result of political issues and the challenges facing the mining industry, the strategist said.

But the appointment of Pravin Gordhan as finance minister suggests that the sovereign will show discipline in spending, he said.

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