Emerging markets soft to open week; Venezuela plummets; BR Malls prices $175 million

By Aaron Hochman-Zimmerman

New York, Nov. 5 - Emerging markets began the week limping on the day after Sunday's New York City Marathon.

Trading was light and prices fell as the problems in the financial sector joined the weekend's political mess in the headlines. Venezuela led the losers by shaving 2.60 from its 9.25% notes due in 2027.

In the primary, one deal made noise in an otherwise silent new issue market. Brazil's BR Malls Participacoes SA priced $175 million of perpetual notes with a coupon of 9¾%.

Aside from political headlines coming in from Pakistan and Turkey, more financial sector storm clouds rolled in from Citigroup. Charles Prince resigned as chairman and chief executive officer after the bank posted a 57% decline in earnings in the third quarter. He will be replaced as chairman by former U.S. Treasury secretary Robert Rubin while Winfried Bischoff will be interim chief executive officer.

"Citi is the current whipping boy," a syndicate official said, but added that the problem is much wider than one headline and one bank.

Speculating over what may have caused a poor day for emerging markets, the official said: "We're getting so much closer to the end of the year."

People may be ready to say, "I don't want to rock the boat at this point," the official said.

Still, "fundamentally we continue to be in better shape comparatively," a trader said about emerging market's standing amongst other sectors.

In addition, "I suspect that high yield is a little bit removed from this," the syndicate official said.

"It's more about IG [investment grade]," than high yield or even emerging markets themselves which continues to be the safest of the three, the official added.

Also, market volatility began the day screaming past 25.00, but calmed mildly by the day's end for a rise of 1.30, according to the VIX index. The standard gauge of market volatility closed at 24.31.

Emerging markets as a sector held in against U.S. Treasuries, according to JP Morgan's EMBI+ index. The index was spotted wider by 4 basis points at 206 bps. The EMBI+ measures the amount of extra yield investors demand to keep money in emerging markets debt.

Asia 'pretty weak'

Asian trading suffered some more damage Monday as tumultuous Pakistan led the way down.

Rather than specific instances of violence in Pakistan or financial sector trouble with Citigroup, "it's more just the broader market concern," a trader said.

"As long as equities under pressure, we're going to be under pressure," he said.

"The overall market tone was pretty weak and quite defensive," he said.

In the Philippines, the government bonds due 2030 were seen off 0.375 to end at 132.25 bid, 132.75 offered.

Indonesia's sovereigns due 2017, after enduring a long and stagnant stretch in the area of a 105 bid, showed some fatigue during Monday's session, falling 0.75 to 104.25 bid, 104.75 offered.

Riots and protests broke out in Pakistan over the weekend in response to a suspension of the constitution and declaration of a state of emergency by president Pervez Musharraf.

Because of rising Islamic extremism, Musharraf fired judges and imposed censors on the media which spurred local protests by lawyers and journalists as well as objections from the international community.

Still, the United States said Sunday that the billions of dollars of military aid it sends will likely be uninterrupted.

Despite the uproar, Musharraf claims the January elections will go on as scheduled.

Pakistani CDS widened by 75 bps to 100 bps to approximately 425 bps to 475 bps, the trader said.

The cash price of the bonds sank 5 or 6 points on "not a great deal of trading," he added.

The bonds traded at a bid of 85 in Asia, but closed in the United States at 84 bid, 86 offered.

Politics heat up, prices down in emerging Europe

Turkey's prime minister Recep Tayyip Erdogan was in Washington, D.C., Monday to hold talks with president George Bush over possible Turkish military action against the Kurdistan Workers Party (PKK) in northern Iraq.

After the talks Bush agreed to commit more forces to combat the PKK, but Erdogan did not specify whether or not that was sufficient to prevent a Turkish incursion.

Before leaving for the talks, Erdogan said the talks would be "decisive," regarding Turkey's final decision to invade.

The United States is hoping to avoid anything which may destabilize the relatively calm northern section of Iraq, but both governments agree the PKK is a terrorist organization.

The United States is also in need of friends in Ankara who have been stable allies in the war on terror, especially now as Pakistan is in a constitutional crisis over its own conflicts with Islamic extremism, reports the BBC.

As military action still looms, the Turkish sovereign due 2030 dropped approximately 0.30 to close at 157.81.

In Russia, Saturday began official campaign season for the Dec. 2 parliamentary elections.

Given the state of Russian democracy the endorsement of president Vladimir Putin almost assures his United Russia party a comfortable victory, reported the news agency Agence France-Presse.

Although Putin is not expected to hold a seat in the Duma, he is expected by some to find a way to exercise influence in the government.

Because of a change in election rules it has become more difficult for smaller parties to collect enough votes to win a seat. The media is also controlled by the government or businesses with close relationships to the government.

In trading Monday, the Russian sovereign due 2030 also fell, losing 0.30 to finish the day's session at 112.625.

LatAm falls with Venezuela

Latin America suffered with the other sectors, but it was Venezuela which slipped the most. Even fellow high-beta Argentina was able to hang on to some of last week's gains.

The price of oil fell about $1.20 to $94.75 per barrel, but oil-producer Venezuela saw its 9.25% sovereigns due 2027 lose 2.60 to 106 bid.

Argentina spent most of last week losing the ground it gained on the back the election of Cristina Fernandez de Kirchner to the presidency, but it has not lost everything. The discount 8.28% bonds due 2033 were down almost 1.5 to trade at 98.25 after Monday's session, still 0.5 higher than the price the Friday before the election.

Brazil, which provided the day's only new issue via BR Malls, has generally projected a greater sense of stability than the other highly watched Latin American issuers.

The country's government bonds due 2037 lost 0.4 as the issue was spotted trading at 114.5.

BR Malls prices $175 million

The primary market began the week with a whimper, but was not shut down entirely.

BR Malls Participacoes SA priced $175 million in senior perpetual notes (/BB-/) at par with a coupon of 9¾%.

Citigroup and UBS had the books for the deal.

The bonds come with five years of call protection.

BR Malls is a Rio de Janeiro-based owner and operator of shopping malls.

"If the market stays this choppy, it's going to be difficult to get deals done," a trader said.

Many of the issuers still waiting in the pipeline are aware of the market's rough waters and intend to price "market conditions permitting," a syndicate source said.

"If you're going to print ... you've got to be prepared to pay out," the syndicate source said.

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