EM loses rally pace; market speculates over a rate cut; local deals move primary

By Aaron Hochman-Zimmerman

New York, Dec. 7 - Emerging markets could not maintain the modest rally of recent sessions which had heartened investors about the prospects for the end of the year.

In trading, the high-betas were making some of the only gains of the day in Friday's session.

Argentina led the pack by tacking on 1.1 to its discount bonds due 2033.

Spreads were largely tighter as Treasuries sank, but "in dollar price terms it was kind of a mediocre day," a portfolio manager said.

Investors kept volumes low on the Friday before the Federal Reserve Board meeting scheduled for Tuesday. The session also saw moderately positive U.S. jobs data.

The U.S. Department of Labor announced that non-farm employment continued its upward trend by adding 94,000 jobs during the month of November.

The unemployment rate was stable at 4.7%.

"Did we get it right?" the portfolio manager asked.

If the payrolls were bad then the likelihood of a 50 basis point cut goes up, but if the payrolls are good, "then that keeps Bernanke out of the question," he said.

"My own view is that the worst that that could have happened is that the number was really strong and the stock market rallied like crazy," he said.

A syndicate official felt the most probable outcome in light of the data is "back towards 25 [bps] from 50 [bps]," he said.

"It was 44% for a 50 basis point cut," he said, "it's down to 26% now."

Some market watchers were worried that a 25 bps cut would help little or even damage the market.

Still, "25 [bps] seems to be priced in," the official said.

"If they get 50 [bps], I think the market will respond pretty positively," he said.

The question over the size of the rate cut, to many, is the last hurdle of the year.

"Most people are just ready for the end of the year to happen," the portfolio manager said.

"We've got one more week of liquidity, then it's going to dry up dramatically," he said.

Elsewhere, the primary market showed a bit of enthusiasm with the pricing of a NIS 245 million deal from Cyprus' Mirland Development Corp. plc.

China's Huaneng Power International, Inc. also announced its first offering from a new 10 billion yuan program.

Oil prices, which have been rising, were back below $90 per barrel even after the Bush administration made no adjustments to its policy towards Iran in the wake of the new intelligence report about that country's nuclear program.

Light sweet crude was seen trading at $88.25 per barrel.

Volatility was lower for the better part of the trading day, but crept back in the afternoon, according to the VIX index, which finished lower by just 0.11 at 20.85. The index is the standard measure of market volatility.

The dip in Treasuries left emerging markets room to tighten, with JP Morgan's EMBI+ index narrowing 11 bps to a spread of 225 bps. The EMBI+ calculates the amount of extra yield investors will demand to keep money in emerging markets debt.

High-betas up, others flat in LatAm

End of week slowness and a hesitancy over what to make of the economic data from the United States left many investors on the sidelines.

The high-betas grabbed some gains but most investors were playing safe with the other issues.

"For the most part Venezuela and Argentina are up, the other assets are flat to down a smidge," the portfolio manager said.

Argentina was out in front of the winners as its benchmark issue added 1.1 points. The 8.28% discount bonds due 2033 were quoted at 98 bid, 99.5 offered.

Venezuela's president Hugo Chavez has run the range of emotions in the wake of his loss in a referendum vote on Dec. 2.

Chavez said he will step down from the presidency when his term expires in 2013. He had earlier shown a calm and measured reaction to the defeat until a televised news conference late Wednesday when he brashly belittled his opponents and their referendum victory.

Many market watchers are convinced Chavez will again find a reason to change his attitude before 2013.

The Venezuelan 9.25% sovereigns due 2027 added 0.25 to trade at about 101 bid, 101.5 offered.

In Brazil, additional energy deposits were found in the off-shore Espirito Santo oil fields prompting officials to classify Brazil's energy export potential alongside many nations of the Organization for Petroleum Exporting Countries.

The issues due 2018 from Petroleo Brasileiro SA or Petrobras, Brazil's government-run oil company, traded flat at 100.5 bid and a spread of 169 bps.

The real performed well on the news. It was seen at 1.758 to the dollar.

The highly traded Brazilian 11% government bonds due 2040 fell 0.1 to 134.4 bid, 134.5 offered.

Meanwhile, a market source saw potential in the Dominican Republic's bonds due 2011.

The bonds have been widening over the last month, but typically underperform in a downturn, yet outperform in an upturn, the source said.

Asia slips lower before payroll numbers

Asia could not continue the rally which seemed to take hold and inject a cheery tone into the market.

Positive non-farm payroll figures were a mixed blessing as they cast doubt over the possibility of a stronger rate cut from the Fed, which may have served to cut the rally short, a syndicate official said.

In the Philippines, the central bank released results of its consumer confidence survey.

The Consumer Expectations Survey indicated that pessimism is rising, especially amongst the country's poorest salary bracket which includes those earning PHP 10,000 or less per month, the Manila Times reported.

The study examined factors such as family financial situation and family income.

Despite the lack of consumer confidence the peso continued to strengthen.

It was spotted at 41.63 against the dollar.

The Filipino bonds due 2030 fell 0.875 to 134.5 bid.

Indonesia's state-owned Indonesian Export Bank may be converted into a "fully fledged export credit agency" and will now be called the Indonesian Export Financing Agency, the Jakarta Times reported.

The government put the proposal before the legislature on Thursday.

Indonesia's benchmark bonds due 2017 dropped 0.675 to 103.5 bid.

Rally slips away from emerging Europe

The sell-off in Treasuries allowed for some spread tightening, but prices fell on light volumes in emerging Europe.

Ahead of the Fed meeting, "the market's not sure what to do," the portfolio manager said.

In Russia, OAO Gazprom will begin developing a new gas field which will produce fuel expected to reach Europe through the planned Nordstream pipeline, the Itar-Tass News Agency reported.

The western Siberian oil field is thought to contain 600 billion cubic meters of gas. Production capacity is expected to yield 25 billion cubic meters a year by 2011.

The Russian benchmark sovereigns due 2030 were down 0.5 to trade at approximately 113.75 bid, 113.875 offered.

In the Ukraine, an explosion damaged a pipeline which carries oil from Russia to its European customers.

No cause has been reported for the explosion, but the government of the Ukraine pledged to ensure the steady flow of fuel to the rest of Europe.

Also, Turkey's sovereign bonds due 2030 were spotted unchanged at 158 bid, 158.3 offered.

Primary open to local deals

"It's been incredibly quiet," a syndicate desk official said of the new issue market.

"I'll be incredibly surprised if people try to push something through next week," he said about the week beginning Dec. 10.

However, local currency offers were a different story.

Cyprus' Mirland Development Corp. priced NIS 245 million seven-year bonds in two tranches.

The NIS 39 million series A bonds carry a coupon of 6.5% linked to the Israeli consumer price index.

The NIS 204 million series B bonds carry spread of Libor plus 275 bps linked to the NIS-dollar exchange rate.

Credit Suisse acted as the bookrunner for the deal.

The Cyprus-based real estate developer primarily functions in Russia, but also has subsidiaries in Israel and Hungary.

China's Huaneng Power International plans to offer a 5 billion yuan issue from a recently announced 10 billion yuan program.

The locally issued bonds may be increased by 1 billion yuan based on market conditions.

Huaneng Power is a Beijing-based independent coal power producer.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.