Argentina's sovereign US dollar-denominated bonds rallied on Friday, outperforming by far their emerging market peers, after the government repealed a controversial tax on soy that caused farm protests.
The good news for Argentine asset prices was accompanied by some relief for global investors as commodity prices fell, led by crude oil which tumbled 11 percent this week, easing fears of slow economic growth and inflation in the developed world at least.
While the drop in commodity prices may negatively impact emerging market economies and government budgets, lower prices may also have the positive result of limiting inflation in most countries to the relief of consumers.
Emerging markets count on growth in the United States and other developed markets to fuel their own growth and a slowdown in one tends to lead to economic pain in others. Overall, the yield spread for the benchmark J.P. Morgan Emerging Markets Bond Index Plus narrowed by 7 basis points to 281 basis points, with total returns on the day unchanged versus weaker underlying benchmark US Treasuries.
Crude oil prices, down marginally on Friday, have dropped over 11 percent or roughly $16 a barrel to around $129 in the past week. The easing of oil's chokehold on investor sentiment has helped investor sentiment, at least in the short-term.
"The easing of commodity prices has been helpful to the stock market. There is much concern about quarterly earnings but it doesn't seem the US financial system is as insolvent as we thought at the beginning of the week," said one senior trader at a US investment bank in New York. Some better than expected US corporate earnings results have helped brighten investor outlooks, at least in the short-term.
In the credit markets, Brazil's Global 2040 issue is up 0.06 points in price to bid 131.375, yielding 5.567 percent. Mexico's 2022 global issue was off 0.88 points in price to bid 120.50, yielding 5.850 percent.
Earlier, Mexico's central bank raised benchmark interest rates by a quarter of one percentage point to 8.00 percent. The move is the second in as many months in an attempt to tackle inflation despite signs of a slowing economy. Mexico's fight with inflation, which hit its highest level in more than three years in June, is a situation that is being repeated across resource-rich Latin America which has benefited from robust commodity exports and growing domestic demand for goods and services.
"We continue to expect Banxico to hike the overnight rate a further 25 basis points, to 8.25 percent, this quarter, with the precise timing of the move quite data contingent," Barclays Capital said in a research note on Friday. Emerging market equities, overall, were not as fortunate. The Morgan Stanley Capital International index fell 0.89 percent on the day, underperforming US benchmark indexes.
Closing a confrontational four-month long chapter of her seven-month old administration, Argentine President Cristina Fernandez repealed an export tax hike on soybeans. Argentina is the world's third largest soybean exporter and is the largest exporter of soymeal and soyoil. Farmers had vigorously protested against the tax which was based upon a sliding scale-mechanism tied to global prices.
The measure, imposed by executive order, was defeated in the nation's Senate on Thursday by one vote dramatically cast by Fernandez's own Vice President Julio Cobos. "This is good news. What this tells you is the president at least understands that she lost and this is not going to get into a huge fight," said Alberto Bernal, head of emerging market fixed income research at BullTick Capital Markets in Miami.
"This should help asset prices for the short-term but in the medium term I think the risk is tilted to the negative side in terms of the possibility that there will be some acceleration in the implementation of anti-market policies, ie populist measures," he added.
Argentina's portion of the EMBI Plus rallied 2.07 percent, driving yield spreads over comparable US Treasuries narrower by 38 basis points to 598 basis points. Argentina's benchmark Discount bonds surged 2.250 points in price to bid 75.75. Stocks in Buenos Aires rallied on the news. The Merval index rose 0.41 percent to 1901.25. US soy prices fell 3 percent on the news on the assumption that world supplies will increase.