Recent volatility across asset markets seems to have abated somewhat as befuddled markets appear to be finding their feet; although the future Trump administration policy stance still remains unknown. One thing that does appear to be ‘known’ is the future relationship between the US and Russia. After a phone call yesterday between Trump and Putin, expectations are that the two nations will look to work to normalise relationships, formalise trade agreements and work together to combat international terrorism and extremism. Our guess is that Putin will also look to Trump to ease western sanctions on Russia which are due to be reviewed in January; more recently we have heard that Italy, Hungary, Greece and Cyprus have questioned the effectiveness of the sanctions and are pushing for dilution. Although bonds within the region did sell-off post election announcement, holdings such as Russian Railways 7.487% 2031 and Gazprom 8.625% 2034 have recovered into the end of the US close and today’s trading session; up 2-3 points at time of writing. Both bonds remain attractive, yielding over 6.3%, with sufficient 2-3.5 notch protection and expected returns of 19.4% and 13.5% respectively.
Currency markets have also taken a beating over the week, as the dollar continued its rally after Trump’s victory announcement; the DXY Index was just short of its highs witnessed in November last year, peeping above 100 yesterday, but has backed-off today. Since last Wednesday there is no major currency up against the dollar, sterling remains the relative strongest currency, followed by offshore and onshore Chinese renminbi. During times of such currency volatility, the CFETS basket has proven to be a great anchor for renminbi stability. In fact despite falling to a new low against the dollar, the renminbi has actually appreciated against the basket of currencies. Meanwhile the Brazilian real is down over 6% against the greenback during the same period.
Brazil has had a hard week of it with its benchmark 10-year yield almost 1% wider at 5.5%, and its 5-year CDS has blown out 23.5% to 325. Apart from the fact the the country is now rated sub-investment grade by all three major rating agencies, we have never held the country’s debt, whether sovereign, quasi or corporate. Petrobras, the country’s integrated energy company and once considered Brazil’s gem, has seen a huge sell-off on its bonds over trade concerns with the US. The 8.75% 2026 bond has widened 115bps since last week’s election to a yield of 8.12% and spread of 587bps over Treasuries, with three notches of credit cushion. We prefer to instead invest in Mexico's state-owned oil company, Pemex, with the 2026 issue, as a comparison, trading at a yield over 7% and spread of 411bps over with over 5 credit notches of protection. Fair value for the bond is ~157 which suggests that the bond still has ~22 points of capital appreciation to reach fair value.