Brazil, South Africa underperform as sentiment weighs on EM credit; Bahrain rebounds

By Rebecca Melvin

New York, June 27 – Emerging markets credit saw a weak tone again on Wednesday as trade tensions and fears of escalation and the selloff of equity in China as well as the recent decline in the Chinese yuan drove a negative, risk-off tone, a New York-based market source said.

Market action was manifest primarily in the selloff of certain emerging markets currencies like the South African rand and the Brazilian real, which both underperformed, the source said.

South Africa credit spreads were wider as fears related to its economy, which is supported by non-oil commodity trade, including metals, sparked sales. Likewise, Brazil was being hurt by fears that its commodity-based economy will be hurt by the current trade story.

The negative sentiment persisted despite U.S. President Donald Trump easing off on Wednesday on his hardline rhetoric regarding the trade dispute with China, which helped to improve U.S. stocks, Treasuries and junk bonds early in the session.

Chinese equity indexes have fallen 20%, and the currency has declined during the last week, adding to risk-off, slowing-global-growth story that has emerging markets debt investors on alert.

“The headline news is going to be negative for the EM market, with only no news expected to be good news for the medium term,” the source said. He surmised that much of the rhetoric is for political purposes and will continue to be trend toward the harder line through the U.S. midterm elections in November, after which Trump may be more amenable to negotiating with trade partners, the source said.

But there were some idiosyncratic moves on Wednesday. Bahrain credit and its currency strengthened after the country’s allies in the Gulf Cooperation Council pledged to help prevent its current financial challenges from escalating into a crisis.

Bahrain “snapped back hard today,” a London-based trader said. The front-end of the sovereign curve outperformed and the yield curve steepened.

The price on Bahrain notes due August 2023 moved up, pushing its yield to 7.58%, which was down from Tuesday, but far above its levels early this year around 5.22%.

Its credit default swaps traded at 400 basis points from 600 bps on Tuesday, and cash bonds were 70 bps to 200 bps tighter, reversing a blowout in spreads that occurred on Monday.

The Bahrain dinar also recovered with these moves traced to the pledge by Saudi Arabia, the United Arab Emirates and Kuwait to backstop the sovereign, easing fears that Bahrain would default on debt payments, including a $750 million Islamic bond that matures in November.

The allies are discussing all options regarding aid for Bahrain, according to a statement, which said that “an integrated programme” would be put in place to support economic reforms and fiscal stability.

Last month, the International Monetary Fund warned that Manama needed to reform its finances urgently as public debt has jumped to 89% of gross domestic product.

“It was expected that Saudi Arabia, would step in and eventually support Bahrain. It just wasn’t known when,” a market source said.

Turkey’s bonds continued to vacillate since the nation’s elections on Sunday, and the bonds edged a little higher on Wednesday after slipping on Tuesday and after surging on Monday with President Recep Tayyip Erdogan winning that country’s presidential election and his AK Party retaining control of parliament.

With the reelection will come a number of heightened new executive powers, including doing away with the prime minister role; allowing the president to directly appoint top officials, including ministers and vice-presidents; and intervening in the country’s legal system and imposing states of emergency. Erdogan justifies his increased authority as a means for allowing him to address the country’s economic problems and to defeat Kurdish rebels in the country’s southeast.

Turkey’s 6 1/8% notes due 2028 traded at 92, which was up ¼ point from Tuesday but below a level above 93 on Monday.

“Turkey has not been the main focus today. It outperformed, but CDS was flat,” a market source said, referring to its credit default swaps.

© 2015 Prospect News.
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