EM ASIA CREDIT: MNI EM Credit Weekly
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EXECUTIVE SUMMARY:
• EM $ index spreads continued to grind tighter on the back of tariff agreements in ASIA and reprieves in LATAM. The IMF upgraded its 2025 EM growth forecast, largely attributed to China. The new issue market was subdued, with limited activity in ASIA and CEEMEA, with Mexico the main $ issuer.
• ASIA $ benchmark spreads tightened by 1–2bp, while LATAM was 2–4bp tighter and CEEMEA 3-5bp tighter.
• In ASIA, Korea, Thailand & Malaysia agreed tariff deals with the US. The IMF raised growth forecasts, notably for China and Malaysia, while we see risks to the Philippines’ economy, as call centres move to AI platforms. Finally, SK Innovation’s announced weak results.
• In CEEMEA, Turkish bank earnings reflected market volatility, but lower inflation and a loosening rate environment bode well for H2. Hungary cut its GDP growth forecast, which was largely expected.
• In LATAM, the IMF approved $2bn disbursement for Argentina, while Brazil and Mexico currently enjoy temporary tariff relief. Mexico’s supported Pemex via structured P-cap notes. Braskem and Vale reported decent results.
• A rising volume of earnings—typically not a major driver of spreads—coupled with the classic summer lull and limited new issuance, should keep spreads anchored at or near the tight end of their YTD ranges.
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SOFR OPTIONS: SFRU5 96.00/96.3125 Call Spread Sold
SFRU5 96.00/96.3125 call spread 5K given at 6.0.
SECURITY: UK & Germany To Sign Defence Pact In Coming Weeks: Politico
Politico reports that the UK and Germany will sign a wide-ranging defence pact in the coming weeks that will pledge mutual support in the case of a strategic threat to either. This will provide Germany with mutual assistance clauses with both European nuclear powers, and moves towards Chancellor Friedrich Merz's goal of bolstering deterrents to an attack on the European continent away from the US.
- The report says the treaty will build on the joint declaration from 2024 between UK PM Sir Keir Starmer and Merz's predecessor, Olaf Scholz. Claims that the pact will be signed on 17 July, ahead of their respective legislatures going into summer recess.
- The article notes that while sections on countering illegal migration, aiding research and development, and boosting transport links will prove uncontroversial, the inclusion of a section on boosting cross-border exchanges could raise hackles in Westminster. The Starmer gov't is under pressure to reduce both legal and illegal migration to the UK.
- Despite US President Donald Trump's apparent warming towards NATO at last week's summit, European countries remain critically aware that the US is looking to draw down its commitments to protecting the continent. As such, these forms of bilateral pacts, alongside the overarching NATO structure, could become more common. This is especially the case for France and the UK, with countries potentially looking to come under their 'nuclear umbrella' (not just Article 5 mutual response in case of attack, but an active pledge to defend a non-nuclear ally).
GERMAN DATA: VDMA "Slightly Optimistic" On Machinery Orders Following May Data
German real machinery orders increased 9% Y/Y in May according to VDMA data. Base effects underpinned the print as last May was a particularly weak month. On a broader YTD basis, machinery orders rose 3%, with a 4% rise in foreign orders and domestic orders unchanged.
- "This development confirms our slight optimism for the second half of the year. The order situation underpins our production forecast of a real decline of 2 percent for 2025. Global uncertainty remains high. This makes it all the more important for the EU to quickly reach an agreement with the US on ending the ongoing trade disputes and to prevent further escalation", VDMA comments.
- Overall May German factory orders data is due Friday, with consensus looking for -0.2% M/M (following April's +0.6%).
