Emerging Markets: A correction driven by technicals – Deutsche Bank

Analysts at Deutsche Bank suggest that the current sell-off in EM has exceeded their long-standing cautious expectations and they believe this correction to be technical, yet a material retracement might have to wait until December and lower US rates/policy uncertainty.

Key Quotes

“Rather than a fundamental re-pricing, this non-differentiated price action reflects year-end hedging. As UST supply and Fed uncertainty subside in December. We expect a relief rally favoring the ‘safer’ carry longs of RUB, BRL and ARS. We also recommend staying long PLN (vs. EUR) and keep a bullish bias in CLP (on elections) and PEN. Oil also supports some retracement in COP, but we remain cautious in MXN (buying USD/MXN on dips below 19.0) as we see no incentive for early accord. We see a retracement in EM rates conditional on a pull-back in EM currencies and more differentiated price action.”

“Technicals apart, we stay received where inflation risks are low and premium remains attractive. We keep front end receivers in Brazil (Jul18|Jan19 and Jan19|Jan20), Colombia (Coltes 20s and IBR1Y1Y), while favoring receivers in both Russia and Poland with a steepening bias. We favor flatteners in Chile (2s5s), Peru (Sob37s vs Sob 26s) and swaps spread compression trades in Mexico (buy MBONOs 42s) and Colombia (COLTES 24s). Buy Hungarian bonds in the belly vs. paying 5Y5Y, hybrid flatteners in Israel and Romania (but with 6m FX implied as payer).”

“We still see EM credit more resilient than local markets and US HY. We are very skeptical of any debt refinancing in Venezuela under the current government. Position for further price equalization (sell VENZ 18s), trade ranges (buy in low 20s and sell high 20s), and short PDV 20s. Keep long Argentina EUR 18s, EUR Warrants, maintain Turkey 26s vs. 5Y CDS, and favor SoA 27s vs. 22s flattener.”