COMMENT: Q1 dazzles, but what now for Q2 primary?

Well well well, all the talk of emerging markets being stifled by the election of Donald Trump looks to have been just a tad off base. Indeed, even outside of the CEEMEA primary market EM has been on a charge with it being hard not to make a positive return on currencies thus far in to 2017 - the Hong Kong Dollar, Philippine Peso and Turkish Lira the only EM ccies providing negative spot returns vs the Usd.

Breaking down March/Q1 CEEMEA primary numbers

According to IGM data, with a total of 40 deals, March was the biggest month for CEEMEA primary issuance since October 2006 when again 40 deals were priced. Although the last month of Q1 didn't reach the heights of October 2016 in terms of volume (USD 35.6bn vs 37.32bn equivalent), but this largely attributed to the bumper USD17.5bn triple-tranche offering from Saudi Arabia.

The first quarter of 2017 saw a total of 77 lines priced, matching the totals of Q1 2013 and Q2 2014 but unable to surpass the whopping Q4 2012 total of 85 lines. From the volume angle though Q1 2017 takes the plaudits with the biggest total since at least 2000, the chunky USD61.75bn equivalent amassed topping the USD59.19bn from aforementioned Q4 2012.

For reference, the average CEEMEA issuance per quarter since 2000 has been 38 deals for a volume total of USD 23.88bn equivalent. This highlights that Q1 of 2017 provided more than double the average issuance volumes.

Fund flows highlight positive CEEMEA sentiment

Back in February we highlighted that when CEEMEA primary market issuance reached over USD50bn for a quarter, then capital would flow in to regional specific debt funds. As we expected this theory held firm with fund flow data from EPFR highlighting the chunky inflows to EMEA specific debt funds over the past three months.

For our report from February see here - COMMENT: CEEMEA credit risk and flows all point to primary party

Through January and February a USD772.8m inflow to EMEA specific debt funds was recorded whilst for March (for which monthly data is not yet available) these flows again look to be positive with the weekly totals over the past 4-weeks pointing to USD80.58m.

An expected Q1 total in excess of USD850m would comfortably represent the biggest quarterly inflow to EMEA specific debt funds since 2004, beyond which data is unavailable.

The fund flow data supportive of the message from CEEMEA primary market action, the positive sentiment towards regional debt providing plenty of confidence to issuers who know that there is an appetite for higher yielding paper.

What does this mean for Q2 primary?

Although the flow of capital in to EMEA specific debt funds has been strong through the first part of the year, looking at the data on a weekly basis shows that inflows have been gradually declining. This could mean that the overly positive sentiment towards the region is fading a fraction.

For the most part though funding conditions for CEEMEA are pretty buoyant, with only a 13% chance of a Fed rate hike in May currently being priced in. A June move viewed as more likely (63%) but the same old rhetoric applies that EM can cope provided it is well flagged.

Oil slowly making a recovery from the multi-month lows seen in March is also a positive for global risk sentiment whilst the early struggles seen by US President Trump (i.e unable to repeal and replace Obamacare) has implications for the Republican's fiscal reform agenda. In turn, this may be negative for US growth which means a weaker Dollar, lower UST yields, and fewer Fed rate hikes, all positive for Emerging markets.

Positive risk sentiment could be curbed by the French Presidential election race, along with any dramatic turns in the ongoing Brexit negotiations. These likely to have more of an impact on CEE players and could in reality pan out to be non-events with a 2yr timeline for Brexit and Le Pen not leading in the polls.

From a technical perspective, this confirmed by the performance of the iTraxx Corp CEEMEA CDS index, which has dropped to record lows of 162 in Mar (was also flagged in our February special comment) and according to the charts is expected to see continued tightening:

• CEEMEA CDSI GEN 5Y Corp Index has been steadily tightening the 2016 peak at 390.07
• With the broader chart structure bearish, the recent lower gap opening hints further tightening in the near future
• Initial target is 152.93, a 76.4% Fibonacci projection of the 597.98-287.57 tightening, measured from the 390.07 peak
• A further tightening beyond 152.93 opens a test of the 2 year projected channel support near 140.00
• This is worth noting that the index is overstretched and a sudden corrective widening from the 152.93/140.00, cannot be ruled out, though seen limited to 208.14 (2014 low, now serving as a key resistance)

As such, the second quarter of 2017 could provide just as much excitement from a CEEMEA primary issuance perspective. Evidence to this affect seen on the first day of Q2 with no less than five names added to the pipeline and another deal (a tap from Sovcomflot) to price today. CEEMEA primary players then should be ready for action.

jim.lewis@informagm.com