EM tone strong ahead of U.S. election results; South Africa outperforms; Turkey tightens

By Christine Van Dusen

Atlanta, Nov. 8 – Emerging markets assets put in a solid session on Tuesday, even as investors bit their nails and worried over what was likely to happen on election day in the United States.

“Very solid tone overall, a touch reminiscent of Brexit, where the market is 87% positioned for a benign and market-friendly result,” a trader said. “Technicals are supportive.”

Said a London-based analyst, “Market sentiment remains solid as U.S. citizens are going to cast their vote in today’s presidential and congressional elections. Final polls give Hillary Clinton a lead, but markets remain nervous, with actual votes having defied pollsters on previous occurrences.”

While global politics set the tone, “local politics continue to make the difference in [emerging markets],” he said.

He pointed to South Africa, which remained an outperformer on Tuesday, with the rand strengthening and sovereign five-year credit default swaps spreads tightening by as much as 15 basis points over the week.

Cash bonds tightened by just as much, he said, all in response to the dropping of charges against Finance Minister Pravin Gordhan.

“Much of this is on the back of the dropped charges on Gordhan and the release of a report on the political involvement of business groups by the Public Protector, which were perceived as signs for strong institutional independence and governance,” the analyst said.

Looking to Turkey, the sovereign remained under political and market scrutiny, following the arrests of oppositional journalists and politicians, he said.

Some observers believe this could lead to a collapse of the deal with the European Union, in which Turkey would receive financial aid for asylum-seekers – as well as visa-free travel for Turks throughout much of the European Union – if it promised to stop illegal migrants from crossing into Greece. But talks with the European Union continued on Tuesday, even as Turkey continued its crackdown.

Turkey underperforms, rebounds

As a result of all of this, Turkey was an underperformer on Tuesday morning, with CDS opening about 4 bps wider amid muted flows, the analyst said.

“In our opinion, the political headlines are largely priced in but will prevent Turkey risk from outperforming, with tomorrow’s EU progress report potentially highlighting those concerns,” he said. “We don’t expect an imminent collapse of the EU-Turkey migrant deal.”

Even against this backdrop, though, Turkish bonds managed to tighten 10 bps to 12 bps as the day went on.

“Buying across the curve,” a trader said.

Azerbaijan ‘challenging’

From Azerbaijan, bonds remained under pressure, according to a report from Schildershoven Finance BV.

“The economic situation in Azerbaijan remains challenging, and another easing of the national currency rate may negatively affect the demand for Azeri eurobonds,” the report said.

Middle East bonds strong

From the Middle East, bonds were strong at the European close as rates backed up to 1.85%, a trader said.

Saudi Arabia’s notes closed between 6 bps and 9 bps tighter, as did those from Oman.

“Bahrain was bid from the word ‘go,’” he said. “Lebanon active, with short dates still two-way, with locals happy to sell, and meanwhile good size of the 2022 and 2027 trade in the Street.”

Perpetual bonds from the region saw “nibbling throughout the day,” the trader said.

Equate sees demand

The new issue of notes from Kuwait-based Equate Petrochemical Co. KSCC – $2.25 billion of senior notes due in 2022 and 2026 – was active on Tuesday, a trader said.

The company priced $1 billion 3% notes due 2022 at mid-swaps plus 195 bps and $1.25 billion 4¼% notes due 2026 at mid-swaps plus 270 bps.

The 2026s closed on Tuesday at 100.05 bid, 100.3 offered “on solid demand,” a trader said. “Equate’s 2022 still lags, but over time it will be picked up locally, especially 1½ points below par.”

Citigroup, HSBC, JPMorgan and NBK Capital were the global coordinators and joint bookrunners. Banca IMI, Mizuho Securities, MUFG and SMBC Nikko were also joint bookrunners.

Bohai could issue notes

In deal-related news, China’s Bohai Capital Holding Co. Ltd. is pondering whether to issue dollar-denominated notes due in three years, a market source said.

The proceeds would be used to finance the acquisition of CIT Commercial Air.

Other details were not immediately available on Tuesday.

Bohai, a diversified leasing company, is part of Beijing-based HNA Capital Group Co. Ltd.

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