[Delayed] AYA Capital\'s Fixed Income Weekly: "Calm before October-end"

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CALM BEFORE OCTOBER-END

GLOBAL SENTIMENTS
Solid economic releases in the US have supported sentiment on global markets last week as data elsewhere disappointed on balance. Investors’ attention remained fixed on developments in the US and Europe as headlines in Asia were scarce due to the closure of markets in mainland China for the week-long Golden Week holidays. In the US, economic releases have provided a mildly positive environment with manufacturing and labour market data surprising on the upside. First, the Institute of Supply Management (ISM) reported that its index of factory activity in the US rose to 51.1 in Sep’12 from 49.6 in Aug’12, its first break into the ‘expansion zone’ since May’12. The ISM also reported later that its non-manufacturing index climbed to 55.1% in Sep’12 from 53.7% in Aug’12. At the end of the week, the US Labour Department offered further cause for optimism as its report surprised the markets with a drop of the unemployment rate from 8.1% to 7.8% in Sep’12. In Europe, the economic headlines have been less favourable and mostly dampened the positive impact of US data. Notably, the non-manufacturing PMI survey further confirmed weak economic fundamentals in the Eurozone with the PMI services index falling from 47.2 in Aug’12 to 46.1 in Sep’12, its lowest level since Jul’09. In the meantime, the ‘Spanish theme’ and the ‘Greek factor’ continued to reverberate around markets, albeit their impact is still contained by the prospects of the ECB’s OMT. The ECB’s monetary policy meeting last week failed to move the markets materially as its decision to leave the key policy rates unchanged met expectations. Instead, the ECB expectedly focused on its commitment to the OMT program subject to conditionality.
Events to trace: ECOFIN Council on October 9th; global growth outlook announcement by the IMF (October 9th-10th); further discussions regarding Spain.

UKRAINIAN EUROBONDS
Ukrainian Eurobonds delivered a mixed performance over the week, as yield dynamics differed across segments. In line with EM peers, the performance of issues within sovereign universe was fairly positive owing to the increased risk tolerance on global markets following positive economic headlines in the US and the somewhat contained tensions in the EZ. The long-end of the sovereign yield curve witnessed the largest weekly compression in yields – Ukraine’20 and Ukraine-21 gained 1.02% and 1.77% w-o-w. The performance within the corporate segment was less uniform and yield movements varied with financials and agri-issues underperforming. The release of economic data on the domestic front had limited impact on the performance of Ukraine’s Eurobonds. The NBU reported a 2.5% (USD 0.75 bn) drop in its FX reserves in Sep’12, which declined to USD 29.3bn, in a month marked by speculative activity on the interbank FX market and the related spike in the UAH/USD rate.
Events to trace: Watch external factors closely; domestic factors are expected to exert almost neutral influence on the eve of event-packed late October.

UKRAINIAN DOMESTIC BONDS
The prospect of UAH devaluation and increased political risks amid economic slowdown continue to deter material ‘foreign intervention’ into the local bond market despite elevated yield levels. Foreign investors added a mere UAH 97mn (+2.3%) over the week. Thus, last week developments on the local bond market were still confined to the activity of local investors. However, even among domestic participants the reawakening of interest a fortnight ago quickly faded in the first week of October as the MoF started the month with a new reduced-auction schedule. As a result no auctions were held last week. In the secondary market, the number of deals fell by 28% in the week-to-Thursday, with a corresponding decline of 69% in the notional value of traded securities. This “autumn fall” is attributed to significant squeeze in liquidity on money market. Banks’ holdings at the CB dropped from UAH 22.8bn on Monday to 16.2bn on Friday, taking the average holdings down by 8.3% (UAH 1.7bn) w-o-w. The level of liquidity in the banking sector gradually declined throughout the week despite the NBU’s UAH 0.9bn repo transaction, most likely due to actions of Naftogaz (that could have been buying USD directly in the NBU) and the deferred transfer of monthly tax payments (VAT and excise) to the Treasury’s coffers at NBU. As a result, money market rates have risen sharply in Thursday-Friday.
Events to trace: No significant data releases are expected; watch NBU’s sterilization policy.

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