Morning Commentary: Brazil focus to shift to 2018 elections; rare pullback in EM bond fund flows

By Rebecca Melvin

New York, Dec. 15 – Friday’s emerging primary markets continued to see a small number of new issues pricing out of Asia, but other regions were mostly quiet to close out the week, according to market sources.

Postponement of a vote on Brazil’s pension reform bill to February hasn’t caused “huge selling,” a New York-based market source said regarding the news that jarred the market on Thursday.

“People have been adjusting down their expectations over time as it became watered down,” the source said. “By the time you get to February, there is likely to be some additional information and shape to elections, and that may take more attention.”

Brazil is one of several Latin American countries with elections scheduled in 2018. Brazil’s presidential election will be held in October. Colombia has elections scheduled in May and Mexico in August.

Outflow in EM bond funds

Emerging market bond funds experienced net redemptions in the second week of December ahead of the U.S. Federal Reserve’s third rate hike for 2017, EPFR Global reported.

There was an outflow of $311.52 million for all dedicated emerging markets bonds funds, including those devoted to the dollar-denominated trade and those with local currency bonds, representing only the fourth time this year that an outflow has occurred and a big improvement on the $1.17 billion net outflow for the week before 2016’s last Fed meeting on Dec. 14, 2016.

“It wasn’t very dramatic,” EPFR’s Cameron Brandt said of this past week’s outflow.

The other outflows of 2017 included a $373 million outflow in the fourth week of January, a $79 million outflow in the second week of August and a $118 million outflow in the second week of November.

The outflows seemed to be tied to concerns related to U.S. interest rates, Brandt said.

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