Investor aversion to emerging markets assets increased on Friday as a combination of weak US jobs data and soaring commodities prices stoked fresh fears of stagflation in the world's largest economy. Venezuela was the asset class's lone exception, as US crude prices soared to record highs over $137 per barrel amid reports that an Israeli official called attacks on Iranian nuclear sites "unavoidable."
The more than $8 jump in New York oil prices boosted the economic prospects of the oil-exporting country. Emerging debt spreads over comparable US Treasuries, a key gauge of risk aversion, widened 8 basis points to 252 basis points on the benchmark J.P. Morgan EMBI+ index, after a report showed the US unemployment rate rose to 5.5 percent in May, its highest level since October 2004.
"The debt market is negative today, I see a little risk aversion," said Luiz Felipe Brandao, emerging markets director at Arkhe brokerage in Sao Paulo. Stagflation fears returned to investors' minds as a result of the poor US jobs report and a jump in commodity prices that sent the CRB index to another all-time high. Wall Street indexes plunged as a result, and Latin American stocks followed suit, with losses of about 1 percent according to the Morgan Stanley's MSCI index for the region.
Emerging debt returns were flat on the EMBI+, keeping year-to-date gains at around 2 percent. But Bazil's global bond due 040, the most liquid emerging market paper, rose 0.187 point in price, after three consecutive sessions of losses. Despite the overall increase in risk aversion, Venezuela's spreads narrowed 5 basis points to 582 basis points, the EMBI+ showed - the only country of the 15 tracked by the index to see tighter spreads.
Argentina, on the other hand, ranked on the top of the risk-aversion list, saw its spreads widen 13 basis points amid concerns about the economic impact of the country's ongoing farmers' strike. Farmers have been at odds with the government for nearly three months after President Cristina Fernandez raised export taxes on soybeans, the country's main export crop.
"The farmers conflict and the currency run are likely to fade away, but their effects are only starting to be felt: with activity coming down and inflation expectations and wages on the rise, a soft landing looks increasingly distant," Barclays Capital's analysts wrote in a research note.
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