Fed rate increase sends EM prices ‘every which way’; Brazil struggles with ratings, politics

By Christine Van Dusen

Atlanta, Dec. 16 – Emerging markets assets put in a volatile session on Wednesday, spurred by the Federal Open Market Committee’s decision to raise rates for the first time in about seven years.

Though the market largely expected the FOMC to raise the benchmark interest rate by 0.25 percentage points, spreads and cash prices were “moving every which way,” a New York-based trader said.

“With the first hike out of the way and markets seemingly calm, we can focus on global economic fundamentals in an effort to determine fair value and future directions of various asset classes,” he said.

Meanwhile, Brazil continued to “haunt the market,” a trader said, after the sovereign was downgraded to junk on Wednesday by Fitch Ratings. Standard & Poor’s made the same move in September.

“The question now is, how many forced sellers will there be?” he said. “Maybe not too many in the next few days, but this will pose severe problems for a country with Brazil’s deficits and external indebtedness, public and private.”

Brazil’s five-year credit default swaps spreads finished the day at 482 basis points from 455 bps after trading as wide as 500 bps.

Elsewhere in Latin America, Mexico’s five-year CDS closed at 172 bps from 185 bps, a trader said.

Venezuela’s 2027s moved down to 41.25 from 43 while PDVSA’s 2017s closed at 53.50 from 54.50, he said.

Wednesday also saw Turkey’s curve begin to steepen, continuing Tuesday’s trend, a trader said.

“The 2025s and 2026s would be my choice of bonds,” he said. “Cash looks cheap to CDS here, as the Street is probably long of cash. One- to three-year bonds are for sale as everyone tries to avoid front-end exposure to rates.”

Flows for Turkish banks were balanced, he said, with some selling seen for five-year senior notes.

“Turkey corporates are seeing small selling from retail but the odd bid in better size from real money,” he said.

Yasar sells part of business

In other news from Turkey, Yasar Holding AS sold about 75% of its paint business to Toyo Ink America LLC.

That move should be seen as “credit-positive, but we await terms and proceeds to see the impact on leverage,” the trader said. “But this was not expected, so should come as a positive surprise to investors.”

Compliance may be challenging

Taking another look at Brazil, the sovereign was additionally affected by news related to its primary surplus target.

“The big news overnight was that the Brazilian government set the primary surplus target at a band of 0% to 0.5% of gross domestic product, depending on tax revenue performance, potential recognition of debt to federal banks and other assorted items,” a trader said.

With Brazil in recession, low commodity prices and government approval of a financial-transaction tax “uncertain at best,” he said, “it is clear where the risks to even compliance with that band lie.”

All of this financial turmoil “represents a major defeat for Finance Minister Levy,” a trader said, “and most likely will ensure his resignation.”

Brazil faces other troubles

Separately, Brazil’s Supreme Court was expected to decide on Wednesday the opening of impeachment procedures against President Dilma Roussef.

Meanwhile, retail sales in October were surprisingly positive for Brazil, increasing about 0.6%, month over month, according to report from Barclays Capital.

But this “upside surprise does not materially change the risks to our forecast of a negative 1.3% quarter-over-quarter GDP print for fourth-quarter 2015,” the report said. “Consumer confidence and real wages fell, with the unemployment rate moving higher and banking credit shrinking.”

Bonds widen in poor liquidity

In the early afternoon, Brazil was “getting carted out of the building in extremely poor liquidity,” a trader said.

Bonds were 40 bps to 60 bps wider while five-year credit default swaps spreads moved out 40 bps.

Later, bonds moved off their lows but were still between 25 bps and 40 bps wider, another trader said.

“This is short-covering, though,” he said. “Little client intervention. Almost all sellers. It is too early to call the bottom though. When the country gets out of the major credit indices, the real selling will start.”

Nord Gold plans acquisition

Also on Wednesday, investors were paying attention to Nord Gold NV, a mining company with interests in Russia, Kazakhstan, Burkina Faso and Guinea. The company is planning to buy the remaining shares of Northquest Ltd. Co.

The deal should not impact the company’s eurobonds, according to a report from Schildershoven BV, but Nord Gold’s eurobond “is overvalued” compared to Russia-based Polyus Gold International’s bond.

South Africa rating affirmed

South Africa remained on radar screens on Wednesday after Moody’s Investors Service affirmed the sovereign’s Baa2 rating but changed the outlook from stable to negative.

The ratings agency adjusted the outlook because South Africa’s growth is likely to remain low as a result of political issues and the challenges facing the mining industry, the strategist said.

But the appointment of Pravin Gordhan as finance minister suggests that the sovereign will show discipline in spending, he said.

© 2015 Prospect News.
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