Morning Commentary: Investors await Yellen speech, watch Turkey; EM sentiment ‘cheerful’

By Christine Van Dusen

Atlanta, Aug. 22 – Emerging markets assets stayed mostly solid on Monday morning as investors awaited Friday’s speech by Federal Reserve chairman Janet Yellen and kept an eye on the tumult in Turkey.

“There is currently little that can dampen EM investors’ cheerful mood,” a London-based analyst said. “Going into this morning, oil prices have given up some of their gains [from] last week, with Brent crude trading with a 40 handle again.”

In news from Turkey, Fitch Ratings affirmed the sovereign’s BBB- rating but revised the outlook to negative from stable, the analyst said, as a result of political instability and security concerns.

“Slightly worse than expected, as some looked for an unchanged outlook,” a trader said.

A suicide bombing on Sunday in Gaziantep killed a reported 53 people in Turkey.

“The negative outlook means that Turkey is at the brink of losing its investment-grade rating at Fitch and Moody’s while S&P has the unsolicited rating already at BB negative,” the analyst said. “This could halt the spread normalization we have seen after the initial sell-off in the aftermath of the coup attempt.”

Still, “Turkey risk currently prices in a premium over other credits rated in the crossover region,” he said. “And a benevolent market backdrop might offset concerns of a potential downgrade for the near term.”

In trading on Monday, the sovereign curve steepened a touch, with better offers on the long end and bids in the short end, the trader said.

“Banks, although wider, are only marginally underperforming for now, as retail are better buyers on the platform,” he said.

Egypt rating affirmed

Looking to Egypt, the sovereign's rating was affirmed at B3 by Moody's Investors Service.

“The rating agency also acknowledged the recent staff-level agreement between the Arab Republic and the IMF, which is deemed credit-supportive,” the analyst said.

Sovereign bonds have outperformed others in the region, with Egypt's 5 7/8% notes due 2025 tightening about 85 basis points, he said.

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