Oil prices spike but EM remains weak; Spain turmoil hurts sentiment; Peru spreads move out

By Christine Van Dusen

Atlanta, Jan. 4 – Tensions between Saudi Arabia and Iran led to a spike in oil prices on Monday, but emerging markets assets still did not get a boost during the early session.

“Risk markets remain weak on the highlighted political risk and weak data from China,” a London-based trader said. “But the rally in rates will help cash prices stay unchanged.”

Also hurting sentiment, he said, was the political picture in Spain, where Catalonia was expected to set new elections.

“We also have some worry from Spain brewing in the background, as they seem less likely to form a government,” the trader said.

Spreads widened in response to these big-picture problems, with names like Saudi Electricity Co. and Bahrain weakening, another trader said.

“Difficult start to the year,” he said. “Did see demand for most of the perpetuals throughout the session and the usual favorite senior five-year bank paper.”

Long-dated paper from the Gulf region was “around,” he said, “as steep curves will likely remain the norm.”

The market is “expecting some supply soon,” he said. “It remains to be seen who will open proceedings in 2016.”

Monday also saw the bond curve from Turkey stay flat, another trader said.

That situation was “justified by the risk-off sentiment in general, and possible supply,” he said. “Inflation numbers are out and higher than expected. With political tensions in the Middle East we could see some spillover in Turkey.”

Peru weakens, CDS widen

In other trading, Peru opened on Monday on a weaker note, a New York-based trader said.

“Cash prices are mostly unchanged on spread widening,” he said. “Starting the year on a weak note.”

At the end of the day, five-year credit default swaps spreads were wider for most Latin American names, with Mexico’s at 176 bps and Brazil’s passing 500 bps.

“Cash prices managed to close mostly unchanged to a touch lower, as spread widening is tempered with the United States Treasury rally,” another trader said.

High yield moves lower

High-yield names from the region finished lower on Monday, with Venezuela off the intraday highs, a trader said.

The sovereign’s 2027s ended the session at 41 while PDVSA’s 2017s closed at 52.75.

Argentina’s 2024s closed at 107 after trading slightly above that at the end of 2015.

“Overall, flows were mostly subdued for the day, with not a whole lot of conviction seen,” he said.

Uncertainty in new year

Many investors are pleased to be leaving a tumultuous 2015 behind but are unsure about how well they will fare in 2016, another trader said.

The new year “doesn’t look like a straightforward one either,” he said. “But have we had most of the macro adjustments already? Will a pick-up in developed-market economies to support global growth happen? Seems like a big ask.”

No matter what, “volatility will remain high and a more proactive investment stance will probably perform better in this environment,” he said.

© 2015 Prospect News.
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