Morning Commentary: EM trades well ahead of holiday; Turkey widens; Ukraine, Russia, Noble eyed

By Christine Van Dusen

Atlanta, Dec. 23 – Emerging markets assets were on solid footing on Wednesday morning as global economic conditions improved and liquidity thinned ahead of the Christmas holiday.

“Risk markets continue to trade well as signs of China's economy show some stability and United States data continues to show signs of resilience overall,” a London-based trader said. “Commodities also look to have found a temporary floor, but I guess not many are buying into that story just yet.”

Most of the morning’s flow was with buyers who were looking to add risk and duration.

“Some paper coming out in Russia,” he said.

Looking to Turkey, sovereign cash – which has traded well for several sessions – widened about 6 basis points on Wednesday morning “on concerns that the central bank's independence seems compromised,” he said.

“The policy failed to move toward an orthodox approach, and the simplification of policy also did not take place,” he said. “The central bank should make progress in the next meeting on the simplification of policy.”

Turkish banks stayed strong, with buyers for Akbank TAS, he said.

“Locals and retail continue to lift subordinated debt, with some real money also adding,” he said.

Heading into the new year, “most are looking out for supply” from Turkey, he said.

From Ukraine, the sovereign has weakened somewhat so far this week, with minor selling, said Fyodor Bagnenko, a fixed income trader with Dragon Capital.

But “the market overall was virtually dormant, with most people on holidays,” he said.

Ukraine-based Metinvest BV has been somewhat active, with “some bottom-fishing demand and a few switch trades being put on,” he said.

Russia faces new sanctions

Looking to Russia, the market was watching its bonds to see the impact of the United States’ new sanctions against corporates.

“The new U.S. sanctions against Russian companies shouldn’t actually worsen the current conditions for the entities,” according to a report from Schildershoven Finance BV. “However, the move could be considered by investors as another stage of conflict escalation between Russia and the U.S. As a result, we do not rule out some correction of Russian eurobonds today following the announcement.”

Noble could get a boost

Hong Kong-based Noble Group Ltd.'s eurobonds should get a boost from selling its stake in its agriculture unit for at least $750 million to China’s Cofco Corp., Schildershoven said.

“It will boost the Noble Group liquidity and can reduce the debt burden,” the report said. “Besides the upfront payment it might receive as much as $200 million in additional amount, depending on the future growth of the unit.”

The proceeds from the deal will be used to pay down debt.

“In recent months, Standard & Poor’s and Moody’s Investors Service noted they might reduce Noble’s credit rating to junk if its liquidity position didn’t improve,” the report said. “The cash injection from the sale would strengthen its balance sheet above the investment-grade threshold that both S&P and Moody’s use.”

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