Emerging markets recover slightly; volumes thin; screens go dark; August primary sets in

By Aaron Hochman-Zimmerman

New York, Aug. 14 - Emerging markets traded slowly on Friday as traders felt that August had finally arrived.

"At 2 o'clock all the screens were really dark," a strategist said.

After two deals priced from Latin America and one from Asia priced over the week, the primary as well as secondary trading look to calm down into September, when the strategist believes the market will operate under the specter of the one-year anniversary of Lehman Brothers' collapse.

Investors were guessing which way the market would head when volumes returned, but the strategist noted that "things have come an awful long way."

A plan to "buy the dips" is probably the safest way to play, he said, as a near-term retracement is likely but is not a long-term situation.

"It's hard to argue for there to be a huge rally going forward," he said. "Plus, we've seen huge issuance in July and August, so that's taken a lot of cash out of the market."

Some Latin American sovereigns may issue in the coming months, sources said, but Romania seems ready to tap the market in September, the strategist said.

From the major markets, equities had a difficult day but still shaved volatility by 0.44 to 24.27, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector, emerging markets widened by just 1 basis point to a spread of 371 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 2 bps with a spread of 385 bps.

The diversified index has a less strict liquidity rule for inclusion.

'At a crossroads'

Bond levels have traded mixed over the week, but behind the ordinary activity, investors have been positioning for what is "really a crunch-point now," a trader said.

"We're at a crossroads," he said.

The recent rally passed by a large segment of the market.

"So many people have missed the timing because they did not believe in it," he said about the rally.

"If you were bearish, you've got a decision to make," he said.

Investors must either unwind their bearish positions for a renewed rally or assume that their old positions are better suited to the current environment.

If they guess incorrectly, "you could miss it both ways," he said.

There is no major trend to help map out the course ahead.

"I can't definitely call the turn here," he said, although "we seem to have run out of steam a little bit on the bullish sentiment."

At the moment, "positioning is fairly balanced across all markets," he said; meanwhile, some higher yielding paper may have been built up too fast.

'Two-way risk' for emerging Europe

Emerging Europe was "choppy as a whole," a trader said, but "the trend is continuing to fall wider."

"There are not too many sellers of cash," he said, and for now, "I don't think there's any point to being short bonds...I don't think there's any point to being short CDS."

The real money accounts are driving the cash, he said, while the dealers and hedge funds are behind much of the movement in CDS, he said.

Many bonds in the high-yield space have been inflated a long way, but the rally may soon continue, he said.

Now, "there is two-way risk" for issues in places like Ukraine and Dubai.

The Ukrainian bonds due 2016 were seen at 79½ bid, 82 offered.

The Dubai Holdings Group bonds due 2014 were quoted at 80 bid, 82 offered, while the DP World Ltd. bonds due 2017 were spotted at 82½ bid, 84½ offered.

Meanwhile, one of the traditional emerging European credits went on a ride over the course of the week.

Turkey stood out as an underperformer, the trader said, after a major firm advocated shorting the 2030 benchmark.

The Turkish bonds due 2030 were seen as high as 159 bid and were quoted on Friday at 153½ bid, 154½ offered.

Russia's bonds also due 2030 were better by 0.3 point to 100¾ bid, 101 offered.

IMF ups allocations

The International Monetary Fund announced that it approved a general allocation of $250 billion SDR to member's foreign exchange reserves.

The financing will be delivered on Aug. 28.

"The equivalent of nearly $100 billion of the general allocation will go to emerging markets and developing countries, of which low-income countries will receive over $18 billion," the IMF said in a statement.

Argentina, LatAm eyed

Argentina is slated to receive $2.5 billion of the new $250 billion in the IMF's special drawing rights, the IMF said.

The 8.28% Argentine discount bonds due 2033 were seen at 59½ bid, 61½ offered.

The sovereign issues consolidated midweek after the initial bluster from Venezuela president Hugo Chavez, which briefly turned heads in the market.

His anger over the greater U.S. presence in Colombia drew attention but did little to draw sellers or buyers.

The Venezuelan 9¼% bonds due 2027 were spotted at 70 5/8 bid, 72½ offered.

Also in Brazil, the 11% government bonds due 2040 were seen at 131.1 bid, 132 offered.

Meanwhile, on the corporate side, Petroleum Co. of Trinidad and Tobago continued to hold its more than 4-point gain after pricing its $850 million 9¾% bonds at 99.217 on Tuesday.

The bonds were seen at 103¾ bid.

Mexico's Grupo Petrotemex SA de CV priced $200 million of 9½% bonds at 99.029 on Wednesday, but "it's a small issue; it's hard to find a price," a strategist said.

Asia up ahead of confidence report

In Asia, trading was generally positive as the local markets were not burdened by the U.S. consumer confidence report, which torpedoed U.S. equities.

"It doesn't really reflect what happened," a strategist said about Asia's credit levels.

The new 5½% bonds due 2019 from what is considered an Asian-centric name, China's Swire Pacific Ltd., added 1 point.

The bonds were seen trading at 102.15 bid.

Among the sovereigns, "the Philippines was down a little bit," a strategist said.

The sovereign bonds due 2030 were spotted at 127¼ bid, 128¼ offered.

Indonesia's government bonds due 2019 were seen at 133 bid, 133 7/8 offered.

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