Rates reversing yesterday’s rally in Europe, US CPI in focus

Fixed income yields dropped, and US Stocks fluctuated as traders waited for the inflation figures which may give direction on how hawkish the US FED will be in their monetary policy stance. The S&P 500 futures fell 0.1% while the Nasdaq 100 shed 0.2%. Equities futures across Europe and Asia made moderate gains. The yield on 10-year US treasuries dropped to close at 1.93% from 1.94%. WTI closed at $89.39, a drop of circa 0.3% from previous level of $89.60 while gold closed at $1,830 from a previous level of about $1,808 an ounce as some demands were seen as gold remained a haven in the midst of geopolitical and inflation risks. Market expects US inflation Data which would be released later today to surpass 7%. The outcome of inflation data will determine the speed at which US FED would hike rates. This may create more uncertainty in the fixed income & Equities market in the months ahead. However, Market seems optimistic that by second half of the year, inflation rate will start to decline.

Rates reversing yesterday’s rally with 10Y DBRs some 2bps higher than session lows. DBRs had rallied on Tuesday as ECB officials continued pushing back against the market’s expectations on hikes; the 10Y closed 5bps lower at 0.212%. ECB Executive Board member Isabel Schnabel called for a more measured approach highlighting the need to minimise risks of “acting too late and acting too early”. Schnabel’s remarks also provided support to peripherals emphasising that all euro area yields are considered in the analysis of policy transmission; 10Y BTP yields fell some 10bps, narrowing the spread to bunds. The support for peripherals marks an about-turn for the ECB with Lagarde having signalled that “spreads have not widened in any significant manner” last week. The euro closed about flat at $1.1425.

Apart from the buzz yesterday surrounding their expected issue of $2.8bn in the Eurobond space in the first quarter, the Angolan government does expect to end year with 73% debt to GDP there by reducing the debt-to-GDP ratio 12bps, which should have closed at 85% in 2021. The expected plan this year should lead to the nation’s positive economic growth as they are expected to grow by 2.4% after 6yrs in the red. The government’s plan to raise as much as $2.8 bn in the foreign-currency denominated bonds market in 2022 is buoyed by a rating upgrade and rising oil prices to return to the Eurobond market for the first time in more than two years. Africa’s second-largest oil producer is banking on rising energy prices and its improving fiscal position to lure investors to the sale and may use the proceeds to repay existing debt and diversify its energy dependent economy. Angola’s economy is forecast to expand 2.9% this year after exiting five years of recession in 2021. Following the announcement of the new issue, Angola’s sovereign bonds extended its gains yesterdays with the yield on the short-term paper (2025) falling c.18bps from 6.53% to close the day @ 6.35%. That rally seems to have extended into Thursday’s trading as yields now sit at 6.30% (11:33am GMT+1). To put the rally into context when compared to another strong SSA sovereign with similar fiscal economic numbers which is Nigeria that also experienced a rally on their curve, yields on the longest end of Nigeria (NGERIA 8 ¼ 09/28/2051 REGS Corp) saw a c.10bps drop compared to the long end Angola (ANGOL 9 ⅛ 11/26/2049 REGS Corp) which witnessed a c.15bps drop.

Notable incident in the region yesterday was in the Mexican non-bank lender industry and specifically the issuer Credito Real whose CHF bonds, CREAL 2 7/8 02/09/22 Corp, were due yesterday with the notorious payment of 184MN(USD). There was much talk of a secured financing facility that Goldman Sachs was reportedly aiding in facilitating that had fallen through and the issuer has now commissioned law firm DLA Piper and restructuring adviser FTI Consulting to evaluate strategic alternatives towards its short and long-term financing obligations. There isn’t much info as to what the restructuring may entail for now. Recovery values have ranged from zero to 30c on the dollar (worst, medium case scenarios). Still a note of a prominent analyst was hopeful that the restructuring may entail a partial delay of maturity for the CHF with a part payment now whilst the remaining is tied to CREAL’s US asset sale and coincide with the maturities of the other outstanding bonds. However, there’s no substantiate material to back this for now.  The general sentiment, however, is that the issuer is trying to turn things around by switching the members of the board and their international relations spokesperson (new IR has ex-experience in BBVA and Pemex) as many believe the situation currently faced is predominantly due to mismanagement. Most of the curve is currently trading around 15 handle.

The RUB holds yesterday’s gains at 74.70 down from year-to-date lows of 79 level marked on the 26 /01 at the peak of the Russia Ukraine escalation. Other drivers supporting the rouble could be CBR’s expected rate hike this Friday (tomorrow) of 100bps although some analysts (VTB) have shifted their expectations to 50bps, i.e., instead of a one and down move it could be phased out some on the back of stickier than expected inflation. RUSSIA 5 1/4 06/23/47 Corp traded higher yesterday to reach low 111 handle in IDB auction mids from 109 level two days prior. The move was aided by a general improving sentiment on the geopolitical angle encompassing Russia at the moment and of course the reining back of overall core rates and in particular the benchmark UST 30s. On the equities side the MICEX is also trading stronger at 3162 up 13% from lows marked on the 24.01. Important meeting occurs in Berlin today on the geopolitical front between Ukraine, Germany, France and Russia to revive the so-called Minsk peach deal signed under former Ukraine president Poroshenko. The deal ranges from a cease fire to constitutional change, to the grant of undefined special status to separatists in the east and to the restoration of Ukrainian control over its borders