Emerging markets turn mixed; Iraq bond drops; Argentina tightens; Venezuela, PDVSA jump

By Rebecca Melvin

New York, Aug. 11 – Emerging markets turned mixed on Friday with some regions remaining heavy, but little changed, while a few bright spots developed amid ongoing heated rhetoric between the United States and North Korea.

The new issue market was mostly quiet.

“The general tone is still a little heavy,” a London-based trader said early Friday.

The Republic of Iraq’s 6¾% notes due 2023, of which $1 billion priced on Aug. 2, slipped below par to trade at 99½ bid, 100 offered. That was down from 99 7/8 bid, 100¼ offered seen late Thursday and down from 100.35 bid, 100½ offered a week ago.

Iraq’s older notes due 2028 were quoted at 93 bid, 93 5/8 offered on Friday.

Spread widening that had intensified on Thursday moderated by Friday. Nevertheless, spreads had moved “meaningfully” wider, with seven- to 10-year emerging markets sovereign credits wider by about 10 basis points on average by Friday, according to Trieu Pham, CEEMEA strategist at MUFG Securities EMEA plc.

Spurring the market hit were the threats and warnings U.S. President Donald Trump and North Korean officials exchanged since Wednesday, with North Korea saying that it was “carefully examining” a plan of attack on the U.S. territory of Guam and President Trump coming back in the strongest terms that retaliation would be ferocious.

Trump was set to hold a workforce apprenticeship discussion Friday afternoon and then meet with U.S. ambassador to the United Nations Nikki Haley at the Trump National Golf Club in New Jersey.

Looking ahead, Victor Fu, director of emerging market sovereign strategy at Stifel, does not expect emerging markets to see significant further weakening and viewed this week’s move as a necessary pullback used by investors to take some profits.

“The market is using this as an excuse to take some chips off the table as it has been rising too long and too fast,” Fu said, told Prospect News.

“Unless there are some fundamental changes like weakness in economic data in the U.S., China, Europe or some big emerging market economies,” there should be little further impact from the United State-North Korea geopolitical tensions, Fu said.

During Friday’s session, some emerging markets regions remained heavy heading into the weekend, but there was no notable weakening. In fact, some regions improved, Fu pointed out. In Latin America, for example, Argentina’s sovereign credit spreads tightened about 5 or 6 bps as some investors looked to add to positions ahead of legislative primary elections to be held in that country on Sunday.

The votes will decide the candidates for the legislative elections in October.

“Argentina is pretty cheap,” Fu said.

Also on Friday, Venezuela and Petroleos de Venezuela SA bonds appear to be stabilizing from the past few days’ weakness due to a lack of selling in the absence of economic sanctions imposed on the country by the United States.

“Everyone is watching for the launch of more harsh sanctions in the future, but I don’t think there will be very severe sanctions like baring of oil imports from Venezuela,” Fu said.

“And if that’s true, then Venezuela and PDVSA will likely pay the 2017 notes on Nov. 2 and pay 25% of notional redemption on the 2020 bonds on Oct. 27,” Fu said.

On Friday, the PDVSA 8½% notes due 2017 were seen at 90, up from 85 bid, 86 offered at midweek, and up from recent lows around 70 to 75.

The United States sanctioned eight more individuals in Venezuela on Wednesday, accusing all eight of undermining democratic institutions.

Wednesday’s round of individual sanctions followed on the heels of sanctions against Venezuelan President Nicolas Maduro last week and against 13 other individuals associated with Maduro on July 26.

The sanctions freeze those individuals’ U.S. assets, forbids them to travel to the United States and makes it illegal for U.S. persons to have dealings with them.

With a risk-off tone dominating in the second half of the week, EM credit spreads have meaningfully moved wider, with Iraq risk among the underperformers this week with a 151 bps wider credit spread on the Iraq 6.752% notes due 2027.

In other regions, Kenya’s sovereign bonds were in focus, and that curve was tighter by as much as 25 bps, as it looked like incumbent President Kenyatta won a national election with about 55% of the votes.

Meanwhile high-yielding issuers such as Angola, Gabon, Ghana and Nigeria were wider by 20 to 30 bps.

Data was less relevant most of the week, with the key release to look out being July consumer prices, which came in slightly accelerated to a plus 1.7% for the month versus plus 1.6% in June. But this was nonetheless just below consensus, which was plus 1.8%.

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