Emerging market debt rolls ahead on benign U.S. CPI numbers; Latin American credits higher

By Reshmi Basu and Paul A. Harris

New York, Oct. 18 - Emerging market debt posted higher returns Wednesday as U.S. data suggested that inflation appears to be check and that the economy has weathered the recent housing slump.

The Labor Department reported that core prices, which exclude food and energy, rose 0.2% for a third straight month, coming in line with market expectation. Meanwhile the agency also said that the consumer price index fell 0.5% from August, the sharpest decline since last November.

While the data was mixed, it provided more ammunition for the case that the Federal Reserve will not resume its monetary tightening campaign at its next meeting or for the remainder of the year.

Also adding reinforcement, September housing starts came in stronger than expected.

On that positive backdrop, spreads on the JP Morgan EMBI Global index came in by one basis point as Latin American high beta credits led the charge, according to a market source.

Real money investors and trading accounts were seen covering shorts as well as adding risk.

LatAm higher

Argentina emerged as the best performer of the day, buoyed by better-than-expected August economic activity numbers. During the session, the Argentinean discount bond due 2033 added 0.65 to 100.05 bid, 100.25 offered.

Elsewhere, the Dominican Republic also posted higher prices on the announcement by Moody's that it would place the country's B3 rating on review for a potential upgrade. In trading, the country's bond due 2018 rose 1 point to 113.50 bid, 114.50 offered.

In other news, Ecuador saw a pick up as the country's wealthiest man and market friendly candidate Alvaro Noboa looked to have solidified his lead over radical leftist Rafael Correa. With 87.5% of the paper ballots counted, Noboa nabbed 26.3% of votes, compared to 23.2% for Correa.

"Ecuador is a lot of fun to watch," remarked a debt strategist. "We had someone resign today [Wednesday]," referring to the resignation of finance minister Armando Rodas, stemming from a clash with president Alfredo Palacio.

"I think there seems to be a question of who can promise more to how many people down there in that presidential election in a dollarized economy," he added.

More importantly, the strategist pointed out that both front-runners combined to only grab half of the votes, which means that the remainder electorate voted for someone else. Furthermore, the market will not get a clear reading on the story until the next poll, he observed.

Ranhill sells $220 million

In the primary market, Malaysian engineering company Ranhill Ltd. placed a $220 million issue of five-year bullet bonds (/B-/B-) at par to yield 12½%.

Proceeds will be used for debt financing, working capital and general corporate purposes.

ABN Amro was the bookrunner for the Rule 144A and Regulation S transaction.

Meanwhile, Petrol AD (Bulgaria) revised price talk on its €500 million offering of five-year bonds (B3/B-/B-) to 8½% to 8¾% from the 8¾% area. The deal is set to price on Thursday.

ING is the bookrunner for the Regulation S transaction.

In more primary news, Chilean copper producer Corporacion Nacional de Cobre de Chile (Codelco) set final price guidance for a $500 million offering of 30-year senior fixed-rate bonds (Aa3/A) at Treasuries plus 130 basis point area.

Proceeds from the sale will be used for debt redemption and capital expenditures.

Deutsche Bank and HSBC are lead managers for the Rule 144A/Regulation S transaction.

Finally, also set to price this week, Russia's OAO Gazprom, the world's largest gas-producing company, is currently marketing a benchmark-sized offering of euro-denominated seven-year notes (Baa1/BBB0/BBB-), according to market sources.

The senior unsecured issue will be structured as fixed-rate bullet notes.

Citigroup, Dresdner Kleinwort, Goldman Sachs and Morgan Stanley are joint bookrunners for the Rule 144A/Regulation S deal, which will be issued via Gaz Capital SA.

Meanwhile the roadshow started on Tuesday, and is scheduled to end on Thursday.

Neutral, says strategist

Recently sources have noted that the market has been quite bullish as it rallies on the goldilocks scenario.

On Wednesday, the debt strategist remarked that he was neutral.

"The fundamentals seem fine. Most of the risk would be on the technical side," he said.

"We still think that the nature of the ownership structure of the asset is that there are some levered holders, maybe not as many as in the past," he observed.

With spreads near historic tights, a constant complaint for investors has been valuations. The market is not cheap. And no one can quite gage what the next market correction trigger will be.

During May and June, when the emerging market asset class saw spreads widen, that sell-off was correlated with a spike in volatility in the CBOE Volatility Index (VIX).

Popular sentiment blamed the sell-off in equities on the uncertainty surrounding Federal Reserve policy. But the strategist disagreed, noting that the trigger had to do more with the Japanese yen.

"I think the proximate cause was the prior yen appreciation of the Japanese yen from 118 to 110," he commented.

Since there is a lot of yen funding out there, that movement resulted in shrinking balance sheets, which led to the volatility. The Federal Reserve became an easy scapegoat, he noted,

Declining oil prices

Commodities posted a terrible third quarter as oil prices fell to their lowest level of the year. Sources have noted that that has had a negligible effect on the asset class.

"We're not at all surprised by the relative sharp drop in some of the commodity prices because we think a lot of sort of spec money moved into commodity funds," he said, adding that on a technical basis, commodity markets are speculative given the market is composed of hedgers and speculators.

"So the speculators add liquidity, but they do not actually produce or consume the product, so they can tend to distort things from time to time."

The world's most important commodity, petroleum, has seen a sharp decline in price levels, which has had a strong impact on headline consumer price indexes for all industrialized countries. The United States saw its impact early Wednesday morning as the CPI Index saw a 100 basis points decline.

"Looking forward, I think the most likely scenario is that OPEC will discover that it's gotten used to somewhat higher prices than this, and we will see a genuine and substantial cutback in oil production by the end of the year.

"I think we're vulnerable to a reversal in a direction in oil prices," remarked the strategist.

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