Investors watch FOMC; ruble rallies; Asian high-grade bonds widen; liquidity thin

By Christine Van Dusen

Atlanta, Dec. 17 – Emerging markets investors on Wednesday were watching the Federal Open Market Committee, as well as Russia and the ruble, which rallied on Wednesday morning after the Finance Ministry announced it bought the currency.

“The currency has given up some gains, but credit default swaps are opening better,” a London-based analyst said. “Capital controls remain a last resort for Russia, but we think, following yesterday’s weakness, the chances of them being implemented are now increasingly likely.”

Inflation is now a major concern for Russians, he said.

“Higher domestic funding costs will further impact economic growth,” he said. “Concerns about unrest in the country are a little premature, but clearly that risk is likely to increase if the current situation persists.”

At the same time, the United States is looking to implement tougher sanctions on Russia, particularly its military companies.

“But more importantly for credit investors, [the bill] also authorizes the president to financially sanction OAO Gazprom, if he so wishes,” he said. “The bill also legislates on aid to Ukraine.”

The bill is likely to create a rift between the U.S. and the European Union, he said.

Meanwhile, Federal Reserve Chairwoman on Wednesday afternoon gave a press conference that seemed positive about the U.S. economy but signaled that improvements could be made.

From Asia, high-grade bonds moved 3 basis points to 8 bps wider on Wednesday morning amid one-way flows, a London-based trader said.

“The market tried to de-risk,” he said, “but liquidity was extremely thin.”

China, Turkey in focus

Chinese property companies saw their bonds close between ¼ point and ¾ point lower while high-yield sovereigns moved 1 point lower, a trader said.

The rest of the emerging markets bond universe looked stronger on Wednesday, with credit default swaps tightening about 4 bps for Turkey, the analyst said.

Kazakhstan bonds rise

In other trading on Wednesday morning, long-dated bonds from Kazakhstan were up about 8½ points, another London-based trader said.

“[KazMunaiGaz National Co.] is looking pretty punchy today too,” he said. “A lot of air before we get to par, but I think it’s fair to say these have been oversold.”

Bonds from Venezuela and Venezuela’s PDVSA traded flat to Tuesday’s close, he said.

Ukraine trading ‘disorderly’

Looking to Ukraine, trading was “disorderly” heading into mid-week, even as the political picture seemed to be improving, according to Fyodor Bagnenko, a fixed-income trader with Dragon Capital.

“With no new headlines on IMF aid or new Western commitments on bridging Ukraine’s funding gap, the market is trading on fear and technicals, which are disastrous, given the destruction ongoing in Russian assets,” he said. “Liquidity is very low in this pre-holiday period, and it adds to market stress.”

Ethiopia outperforms

Notes from Africa, which have been down about 10 points this month, were up about 2½ points on Wednesday, a London-based trader said.

“Lots of outperformance,” he said.

He pointed to Ethiopia as a standout during the session.

“Many investors are still licking wounds from the last days, however,” he said. “But if this is about oil and Russia, then it’s not over yet and cash remains poised on the wings.”

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