EM quiet at start of week; NAFTA, tariff uncertainty stoke volatility; Senegal on deck

By Rebecca Melvin

New York, March 5 – Emerging markets restarted the week on a quiet note on Monday after trending wider late last week.

Volatility was a mark of the session in the broader markets, with U.S. stocks rallying after early weakness and U.S. Treasuries slipping after an early bid. The U.S. dollar rallied against the Mexican peso and Canadian dollar as the latest round of talks on the North American Free Trade Agreement were wrapping up in Mexico City on Monday.

The talks ended without a trilateral statement, but they “ended friendly,” a bond market source said. “They didn’t agree on when the next meeting will be, but they made progress on some of the issues. They didn’t release much information, but it was friendly from all the three parties,” the market source said.

President Donald Trump tweeted on Monday that he would include Mexico and Canada under his tariff plan for steel and aluminum unless there was a successfully renegotiated NAFTA. This latest round of talks was the seventh that the Trump Administration has held with Mexico and Canada, but negotiations had more or less stalled.

The Mexican peso came off to 18.80 to the dollar by the end of Monday after standing at 18.90 at the start of talks.

Mexico’s dollar-denominated bonds were under pressure and set to open weaker on Tuesday.

Trump weighed in unexpectedly on trade last Thursday saying that he planned to impose a 25% tariff on all steel imports and a 10% tariff on all aluminum imports. Fears over an impending trade war has intensified uncertainty in the financial markets.

On Monday, Trump tweeted, “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on steel and aluminum will only come off if new and fair NAFTA agreement is signed. Also, Canada must treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying.”

The Latin America dollar primary market has been quieted in the last two weeks by fears of rate hikes and now talk of tariffs, but local currency bond market has been active. Mexican consumer lender Instituto del Fondo Nacional para el Consumo de los Trabajadores (Fonacot), planned to priced $106 million of local currency bonds via Actinver and BBVA Bancomer. The state-owned consumer lender plans to price the 2020 bonds next month, according to a market source.

Among existing notes, Mexico’s 4.6% notes due 2046 ended the day up about ¼ point at 93.59 compared to 93.36 on Friday. The 4.6% bonds have stabilized since dropping from about 98 to 92 in February.

In the primary arena, Senegal is on the calendar for a dual-tranche offering of euro- and dollar-denominated notes. That deal was still ongoing and will not finish before Tuesday, according to a London-based market source.

The deal, including a euro bond for up to 10 years and a dollar bond for 30-years, hit the road for investor meetings on Feb. 28. Concurrently with the new notes, Senegal is offering to buy back up to $150 million of its $500 million of 8¾% notes due 2021. The tender deadline is Monday.

Paraguay is expected to begin investor meetings on Tuesday. It faces a tougher market environment than a week ago for its potential $500 million transaction, and it is expected to have to compensate investors more to get the deal done, according to market sources.

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