EM primary stalls; secondary little changed in light volume; market eyes restart in September

By Rebecca Melvin

New York, Aug. 18 – The emerging primary market remained quiet on Friday as has been the case for the entire week in the face of increased volatility in the financial markets and as the typically slow August period drags on.

Geopolitical tensions and other worries including economic and political concerns have caused a spike in the CBOE Volatility index in each of the past two weeks. On Friday the VIX came back down to around 14.5, but it remains elevated from where it was prior to the rise in U.S.-North Korea tensions last week. On Thursday, the VIX spiked after the terror attacks in Barcelona on Thursday that killed 16 people and injured dozens of others.

Emerging market primary issuance is off 32% for the month through Aug. 18, compared with the same three-week period last year, according to Prospect News’ data.

There has been $8.765 billion of emerging markets issuance in all currencies in 23 deals so far this month, compared to $12.891 billion in 28 deals for the same period last year.

In dollar-denominated deals only, there has been $5.296 billion in eight deals for the first three weeks of August, compared to $9.15 billion in 12 deals for the same period of 2016.

Last year, there was $6.462 billion of emerging market primary issuance in all currencies in the last two weeks of August, which was about half of what was brought in the first part of the month in 2016. If that trend holds this year, it means only about $2.648 billion of issuance would be expected to be brought in emerging markets in the next two weeks.

Given the lull, market players were left to begin thinking about September, when market activity normally resumes after the U.S. Labor Day holiday, marking the unofficial end of summer.

“It’s still quiet in the primary markets for the next two weeks, but expect it to be busy from Sept. 4 onwards,” a London-based syndicate source said on Friday.

Emerging secondary markets were also quiet this past week with little movement in terms of pricing or spreads.

“No pricing on screens, it’s going to be a very quiet day,” a Connecticut-based trader said early in the session.

In fact, the whole week was uneventful as the summer vacation season kept many market players away from their desks.

“We went through a relatively uninspiring week with a lack of meaningful headlines and little flow in EM credit. Despite EPFR reports of a miniscule outflow ($79 million), the market still feels better bid with fears of an armed conflict on the Korean peninsula abating,” according to a report published Friday by MUFG.

EPFR Global reported a $166 million outflow for EM hard-currency bond funds for the week ended Aug. 16. For all EM bond funds, there was a $56 million outflow for the week, compared to a $1.29 billion inflow for the previous week. Local currencies saw an outflow of $51 million.

Meanwhile, JPMorgan’s weekly EM fund flows saw a small inflow of $82 million driven by actively managed funds, a source reported. The JPMorgan flow tallies saw an outflow in hard-currency funds of $139 million, compared to an inflow of $582 million the previous week.

An outperformer in terms of spreads this week was the sovereign debt of El Salvador, which saw its credit tighten by 35 to 55 basis points amid investor hopes pinned on potential pension reform, according to MUFG Securities’ analyst Trieu Pham. Other bright spots included Argentina’s 2027 notes, which tightened by 30 bps and Iraq’s newer 2023 notes, which tightened by 25 bps.

Namibia bonds lagged the broader market and widened by 13 bps after Moody’s Investor Service downgraded the sovereign to sub-investment grade.

There was a light trend toward tightening in the banking sector, with the exception of Qatari banks, which widened on a report that the Qatar government has urged them to line up international investors for ongoing funding due to a liquidity crunch starting to be felt in the country as severed relations with its Gulf state neighbors including Saudi Arabia, the United Arab Emirates, Bahrain and Egypt extends for more than two months.

© 2015 Prospect News.
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