EM credit ending tough month on a weak note; Petrobras notes lower; Echo Polska on tap

By Rebecca Melvin

New York, May 31 – Emerging markets credit was weaker on Thursday as investors flinched at Trump tariff headlines and was closing out on a down beat in what has been a tough month for emerging markets bonds, a New York-based market source said.

The United States announced that it is imposing tariffs on steel and aluminum imports from Europe, Mexico and Canada. The European Union and Mexico have already promised to hit back. Mexico said it will target U.S. made goods, including some laminated steel and pipe products, lamps, berries, grapes, apples, cold cuts, pork chops and cheeses “up to the amount comparable to the level of damage” inflicted by the U.S. tariffs.

The tariff headlines pulled stocks lower and Treasury yields up again. Meanwhile, the Turkish lira slipped back. The relationship between the lira and other regions such as the Middle East and Africa is that when the Lira is under pressure it means that market players won’t sell, a London-based trader said.

The EM market tone on Thursday was not as sour as it was on Tuesday, when EM and the broader markets were roiled by a sharp sell-off of Italian and Spanish bonds amid political uncertainty that threatens the ongoing viability of the euro market. But the poor showing on Thursday doesn’t bode well for EM heading into June, the market source said.

“It all depends on what happens in Italy” and whether the crisis worsens, the source said.

“But the dollar continues to strength against the euro with a new problem in Europe,” the source said.

Political risk in Europe flared up this week just as the worse of currency volatility that hurt EM debt seemed to have subsided. Investors will be watching to see if snap elections are scheduled June 24, which could result in strengthening the position of populist parties in Italy that are against the euro. But late on Thursday two of the anti-establishment parties, The League and the 5 Star Movement, struck a deal to revive a coalition government.

Rates swung, with the yield on the benchmark 10-year Treasury bond sinking to 2.761% at its lows this week, which was down from yield of 2.93% on Friday and 3.113% on May 17.

The fallout this past month has been uneven. Many high-beta names like Bahrain and Tunisia have struggled this week, while low-beta names did well in the risk-off environment. Oman and Iraq were trading pretty well this week, for example.

Brazil in turmoil

Brazil, given its internal economic challenges in the form of worker strikes, has weakened considerably. Brazilian oil workers walked off their jobs on Wednesday for a 72-hour strike to demonstrate opposition to possible privatization of the mostly state-owned oil company and other grievances. The move came fast on the heels of a nine-day nationwide truck drivers’ strike that left Brazilian service stations without fuel and retailers without products to sell.

Five-year credit default swaps for Brazil have widened by about 50 basis points in the past month to 225 bps from 175 bps at the end of April.

On Thursday, Petroleo Brasileiro SA’s bond prices were lower in active trade. The Petrobras 5¾% bonds due 2029 slipped another ½ point, leaving the notes around the 89.5 mark, compared to a better than 90 level on Wednesday.

The Petrobras 7 3/8% notes due 2027 settled down close to 101.75, which was down from 102.5 at the end of Wednesday.

The Petrobras 8¾% bonds due 2026 traded last at 111 compared to 111.5 previously.

Overall, the EM market was “generally weaker,” amid another risk-off day, a New York-based market source said. First the headlines were for a trade war with China and on Thursday it is with Europe, Mexico and Canada.

While it’s tough to say where EM debt will head from here, “I expect EM to continue selling off,” the source said.

Issuers eye primary market

In new issue news, Poland-focused Echo Polska Properties NV announced a roadshow for a euro-denominated offering of notes of possibly five-year or similar maturity starting next week.

Deutsche Bank, HSBC and UBS Investment Bank are the joint lead managers and bookrunners of the Regulation S deal.

The real estate investment company is based in the Netherlands but owns residential, office and retail properties with a focus on Poland.

Atrium European Real Estate Ltd. has selected banks and scheduled a roadshow for an offering of at least $300 million of seven- or eight-year notes (expected ratings: Baa3//BBB-), according to a syndicate source.

Deutsche Bank, HSBC, Citigroup, ING and Raiffeisen Bank International are bookrunners arranging the fixed-income investor meetings in Europe that began in Frankfurt on Thursday.

The proceeds will be used for financing concurrent tenders for the company’s 4% bonds due 2020 and 3 5/8% bonds due 2022. The tenders expire June 4.

Atrium is a Jersey, Channel Islands, company that owns, operates and develops shopping centers in Central and Eastern Europe.

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