Market quiets ahead of holiday week; Peru’s Kuczynski survives impeachment vote

By Rebecca Melvin

New York, Dec. 22 – Emerging market credit was moribund on Friday and likely to remain light next week during the traditional business lull between the Christmas and New Year’s holidays.

“Nothing today,” a London-based trader said when asked about flows in the emerging Middle East and North Africa region as market players wrap up an exceptional year in terms of new issuance and total return.

Total return of the J.P. Morgan emerging market bond indexes ran at about 10% to 11% for the year, market sources said.

News out of Latin America that business-friendly Peruvian President Pedro Pablo Kuczynski survived an impeachment vote of the opposition-controlled Congress late Thursday was not expected to boost bonds since there is a chance that the leader may step down voluntarily.

“There’s a slightly higher change of him holding on, but it’s still below 50% because he may still resign, saying he recognizes that his staying on from a political standpoint would be counterproductive,” a New York-based market source said late Thursday before the vote result was known.

“It’s better not to be impeached because that implies that somehow or another you are guilty. But he may still resign,” the market source said.

The impeachment vote came up suddenly when documents came to light last week that Kuczynski allegedly accepted kickbacks from the Odebrecht SA construction company more than 10 years ago when he was economy minister under then-President Alejandro Toledo.

Kuczynski denied knowing about the payments. He survived the 78-19 congressional vote in favor of impeachment, which fell shy of the two-thirds majority required for such action. There were also 21 abstentions.

“The Congress in Peru is dominated by the opposition, and it is ironic that it is ignoring the fact that they face the same accusations regarding taking illegal contributions from the same company,” a market source said.

Peru is an investment-grade rated sovereign credit, but the bonds are illiquid and do not trade actively.

The political rivalry is a bigger impact on the local currency market than the international market, a market source said.

Modest inflows resume

Emerging markets bond funds recorded modest inflows for the week, with both hard and local currency emerging market funds attracting fresh money, after a mild outflow last week, according EPFR Global. Funds dedicated to corporate debt continued to struggle. Investment-grade emerging market corporate funds posted their biggest outflow since the final week of the first quarter of 2017 and high-yield emerging market funds since mid-March.

At the country level, redemptions from Korea bond funds hit a 58-week high, and Russia bond funds extended an outflow streak stretching back to mid-August.

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