Morning Commentary: EM debt improves; Ukraine spreads pull back in after widening

By Rebecca Melvin

New York, Nov. 21 – Emerging markets debt was slightly better on Wednesday amid an uptick in oil prices and positive stock market action. The improvement followed a very weak session on Tuesday when the market was dragged down by extended selling in U.S. stocks and a renewed downturn in oil prices.

Ukraine’s sovereign debt curve was about 10 basis points tighter on Wednesday after blowing out in the past several days. The sovereign was “battered,” with new issue spreads widening out about 60 bps during that time, a London-based market source said.

Also spreads for the Middle East and Africa region were “a bit better after a very weak session yesterday,” a second London-based market source said.

The MENA and Central & Emerging Europe region primary markets were quiet and Asia also quieted after an uptick in new issue news on Monday and Tuesday. The afternoon trading session in Europe was also quieter than usual, likely due to the upcoming U.S. holiday on Thursday when financial markets will be closed in observance of Thanksgiving. Friday’s session is also expected to be quiet at well, a market source said.

Emerging markets debt has suffered losses in recent market volatility. But on Wednesday, the S&P 500 stock index was regaining some ground, last seen up 28 points, or 1.1%, at 2,669.93. That gain is on the back of a 1.8% drop to 2,641.89 on Tuesday, when the index turned negative for the year. And the index is still down 2.6% for the month. On Nov. 1, it closed around 2740.37 and then ran up to a 2,813.89 close on Nov. 7.

For the rest of 2018, EM debt investors are expected to remain cautious. “The risk in the short term: EM sovereign and quasi-sovereign yields are expected to widen quickly should a deterioration of U.S. corporate credit take place,” a note published by Banco BNP Paribas Brasil SA stated on Wednesday.

“While we believe that EMs do not show an impending systemic risk, we are not calling for a blind bullish stance. Rather we argue that Argentina and, to a lesser extent, Turkey, plus the health of the U.S. corporate credit sector, justify a more tactical, less aggressive strategy in the short term,” the BNP Paribas note, titled “EM sovereign risk: Growing uneasy with US Corporate HY,” stated.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.