Market Overview
Markets traded higher this week on vaccine developments and navigated through U.S. earnings in an acceptable fashion. China’s 2Q growth beat (3.2%) was marred by weak retail sales, which led to some equity panic, although volatility was contained regionally without a major spill-over. The same followed after Singapore’s weak GDP print.
A heavy calendar was dominated by central banks such as BoC, BoJ and ECB, while the EM cutting cycle continues for Indonesia, as we now turn to South Africa, Hungary and Russia next week. Meanwhile, OPEC+ delivered another cut to 7.7m albeit mostly priced-in, as copper traded up on Chilean labor disputes and gold largely held onto $1,800/oz, amid renewed USD weakness that is trending back to March levels. EM (European Markets) credit markets were relatively quiet and received most of their gains via U.S. Treasuries rallying 1-4bp, but the real headline was in UST volatility falling to all-time lows.
Spreads on the whole in EM were virtually unchanged, but CEMBI high yield relative to investment grade now stands at six-week highs on a ratio basis. Instead, the theme is back to new issuance with syndicate desks firing on all cylinders, which could become a source of market indigestion. In the same breath, we continue to monitor defaults which stand at 2.3% in 2020, although the figure will rise after Indonesia’s Modernland Realty failed to stay current on local bonds, triggering a cross-default in its USD debt. Into the weekend, the main risk event lies with the EU Council Summit, even if the base case is further gridlock.
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