Morning Commentary: Risk markets rebounding; Azerbaijan in focus; Brazil’s finance minister resigns

By Christine Van Dusen

Atlanta, Dec. 21 – Emerging markets investors added some risk and duration on Monday ahead of the Christmas holiday and focused some attention on Azerbaijan and Brazil.

“Risk markets [are] finding a small bottom here,” a London-based trader said. “We are rebounding out of the lows here.”

Azerbaijan was in the news after the central bank announced it would shift to a floating exchange rate to protect the country’s foreign exchange reserves at a time of greater “foreign economic shocks,” according to a report from Schildershoven Finance BV.

The sovereign’s 2024s were down 1 point as a result but still managed to bounce 2 points off the lows “as the market realizes that most of the news was already priced in,” a trader said. “The consequences should be seen as overall positive.”

The devaluation is good news because, he said, it means “less reserve-burning” and it will support foreign exchange.

“We should see some suppression in imports that bolster trade balances,” he said.

He recommended investing in the State Oil Co. of the Azerbaijan Republic (Socar), which was recently taken off of credit-negative and receives solid support from the sovereign.

“The company has also said it will be cutting back on capital expenditures and look for cost efficiencies, given the low oil prices,” he said.

Looking to Brazil, the markets were reacting to the Friday resignation of finance minister Joaquim Levy, with five-year credit default swaps spreads and bonds opening weaker, a New York-based trader said.

The news is concerning, according to a report from RBC Capital Markets, “because it will likely drive Brazil fiscal stance away from austerity back to an interventionist and expansionary stance.”

Turkey looks firm

From Turkey, sovereign cash bonds started Monday on firm footing as rates rallied, another trader said.

“The long end continues to outperform as rates flatten, but I think seven-year to 10-year bonds shouldn't lag much in a rally from here,” he said. “Turkey remains one of the flattest curves in EM.”

Banks from Turkey traded well during the morning, with demand seen for names like Akbank TAS, he said.

“Subordinated debt is not as squeezed as before, but remains expensive and tough to short, with buy-ins in the market,” he said. “Corporates are firmer, with real-money putting cash to work.”

Ukraine won’t repay bond

In the latest news from Ukraine, the sovereign says it won’t repay the $3 billion bond it owes to Russia, which brings the two sovereigns closer to a court fight, Schildershoven said in its report.

“Russia said on Friday it will wait until a 10-day grace period on the bond expires on Dec. 30 before starting legal action,” the report said.

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