Early EM rally fades; Turkish and Iraqi credit wider ahead of Kurdish independence vote

By Rebecca Melvin

New York, Sept. 22 – An early rally in emerging markets debt faded on Friday, closing out a week in which emerging markets credit softened.

“There was some hope for a turnaround in the early going following a week in which investors focused on where the markets are heading from here and future monetary policy, among other things. But the rally dampened by afternoon,” MUFG credit strategist Trieu Pham said.

A number of factors may have played a role in the dampened enthusiasm, including more saber rattling by North Korea, which threatened to detonate a hydrogen bomb over the Pacific Ocean in retaliation for tough words from U.S. president Donald Trump in a speech before the United Nations this week.

But North Korea was not a key driver in emerging market credit moves on Friday, Pham said. “It doesn’t help. But the markets are slowly getting used to it.”

The aggressive rhetoric keeps things from rallying, rather than driving the market lower, he said.

In the past month Pyongyang has launched two missiles over Japan and tested a sixth powerful nuclear device following two successful tests in July.

Other factors at play on Friday were uncertainties tied to a possible Kurdish independence referendum and moves in U.S. Treasuries, which had moved higher on Friday.

The Kurdish independence referendum is slated for Monday, but it could still be postponed. Turkey has threatened to impose sanctions if the vote is held.

Turkish and Iraqi credit widened this past week in the face of a possible vote for separation by the Kurds.

The Kurdish referendum looks like it is going to take place, sources said, even though Iraq and other countries are opposing it. There was still a chance that the vote could be postponed, but if a vote is held, “definitely expect a yes,” Pham said.

The Kurds were unlikely to declare immediate independence, but the Middle Eastern ethnic group would look at opening separation talks.

The widening in credit this past in anticipation of the geopolitical tensions tied to this was not an overreaction, and those credits could widen further, Pham said.

Turkey has said that it plans to impose sanctions on the Kurds of Iraq if the vote is held. Those actions could include restricted economic trade, but it is not known what form the sanctions might take.

The Kurds are reliant on Turkey and Iran for their oil exports.

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