EM trading comes back strong; Argentina leads winners; new issues wait to price

By Aaron Hochman-Zimmerman

New York, Oct. 9 - Emerging markets began the short week with a long stride as levels tightened in trading and the primary buzzed with talk about new deals ready to price this week.

Light volumes and low liquidity were not enough to stand in the way of the a bullish market just back from the Columbus Day holiday in the United States.

Feast or famine, Argentina scored the strongest gains from the high betas, adding 0.90 to its benchmark issue.

Typically stable Europe brought most of the headlines as Turkey spoke openly about the possibility of an invasion of Iraq.

Meanwhile, the banks in Kazakhstan continued to cause controversy over the magnitude of the "crisis" they are experiencing. The country's downgrade from Standard & Poor's sparked a good deal of conversation, but the majority of investors were not overly anxious, at least judging from the overall market response.

Asia broadly picked up gains except in Pakistan where gun battles, air strikes and profit taking cut its sovereigns by 0.50.

Latin America quietly performed well, even as a market source predicted continued inflation from Colombia, Chile and Peru.

The VIX clearly demonstrated the market's calm demeanor. The accepted gauge of market volatility fell off a considerable 1.34 to end at 16.12.

Investors' appetite for emerging markets debt grew a few basis points worth as JP Morgan's EMBI+ index was seen 3 bps tighter with a spread of 191 bps. The index measures the amount of yield investors demand to keep money in emerging markets.

Europe stable, Kazakhstan downgraded

In trading, emerging Europe saw a positive session as most of the water cooler conversation swirled around Kazakhstan and the ratings downgrade from Standard & Poor's.

"I cover that area; I'm not overly impressed with the downgrade," said a syndicate desk official.

"The Kazakh banks don't seem to be showing too much concern, although I'm sure they are equally as unimpressed," the official said.

"If the market improves, I'm sure they will make a recovery ... if not, we might have some problems," the official added.

Another source was encouraged by the strength of the Kazakh government and central bank.

The institutions still have enough ammunition to provide liquidity to the sector and maintain the value of the local currency, the tenge, the source said.

Russia's banks, which had been beginning to show similar credit problems to the ones afflicting the Kazakh banks, are generally stable, a market source said.

Foreign financing has helped the sector, but smaller banks are still vulnerable to tightening liquidity the source said.

In trading, the Russian sovereigns due 2030 were flat to Friday's close at 112.188.

Elsewhere in the region, Turkey is reportedly considering mobilizing for a cross-boarder raid into Iraq to pursue Kurdish separatists and members of the Kurdistan Workers Party (PKK).

The United States has warned the Turkish government against taking any military action in Iraq; however the U.S. State Department has also issued statements allowing for cooperation with its ally Turkey.

"The United States is committed to working with Turkey to combat the PKK and other terrorist groups that threaten Turkish citizens and interests," according to a release from the U.S. State Department.

"We will continue to cooperate with the Turkish government to neutralize the PKK terrorist threat."

Also in Turkey, new presidential elections are unlikely, according to a market source.

A new constitutional amendment, which is up for referendum on Oct. 21, allows for direct election of the president and would prevent a new election "crisis," the source said.

The Turkish sovereigns due 2030 were not negatively affected by all of the news. The issue gained 0.10 from Friday's close and traded at 157.35.

LatAm bulls ahead

Latin American trading once again mixed light with strong as issues "bulled up" without a great deal of liquidity in the market, according to a syndicate desk official who specializes in Latin America.

News from Venezuela about new vice and luxury taxes on alcohol, and "fancy cars" and even a rating upgrade for Mexico to BBB+ from BBB did not cause much of a stir.

"The market is trading with a mind of its own," the syndicate official said.

Venezuelan sovereigns did not flinch over the taxes and turned in strong trading. The 9.25% government bonds due 2027 were up 0.55 at 106.25.

Mexico hardly showed almost no reaction to its new rating from Standard & Poor's. Its 5.625% sovereigns were trading up 0.20 at 100.10.

Elsewhere, Brazil's real continues to gain, but a market source said that the country's economic growth is fast enough to bring a rate cut from the central bank sometime in the fourth quarter.

Brazil's economy is healthy and is drawing in money from high commodity prices, the source said.

The bellwether 11% notes due 2040 posted slight gains of 0.15 and traded around 134.30.

Among Brazilian corporates, Cosan SA Industria e Comercio announced a cash tender offer to buy its outstanding 9% senior notes due 2009.

Cosan is looking for consents to amend the 9% notes to make the covenants and events of default consistent with its outstanding $400 million 7% bonds due 2017.

The 9% notes were seen trading at 108.75.

Argentina, which has continued to bounce between big gains and losses, had an up day and led the high betas in trading. Its 8.28% government bonds due 2033 added 0.90 to trade around 92.80.

Volatility has been the only constant in Argentina, but the strong presence of the central bank will eventually calm issue prices, a market source forecast.

'Super strong' day in Asia

Asia showed "fairly significant tightening" on what one trader called a "super strong" day.

The Philippines' debt followed its peso. As the currency rallied, its five-year CDS narrowed 11 bps on the day's trading.

The peso ended the day up at 44.750.

The Philippines benchmark sovereign issue due 2030 traded up 0.325 to 132.625 bid, 133.125 offered.

Pakistan's debt slipped amid negative political headlines as some of the fiercest fighting broke out along its boarder with Afghanistan since the U.S. invasion.

Dozens of soldiers, militants and civilians were killed during the skirmishes and air strikes.

The country's government bonds were generally seen "holding last week's value" despite "a bit of profit taking," the trader said.

The sovereigns due 2017 dropped 0.50 to close at 92.50 bid, 94.00 offered.

Also in Asia, Indonesia's benchmark bonds due 2017 were seen trading up approximately 0.25 at 105.75.

"Overall the tone is pretty strong," the trader said.

Primary talks the talk

The primary produced talk from Mexico's high yield Grupo KUO SAB de CV and the Korea's investment grade Export-Import Bank of Korea.

Last Friday's non-farm payroll figures from the United States helped propel the primary even farther down its positive track, according to a market source.

Mexico's Grupo KUO released talked for its planned $200 million offering of 10-year senior unsecured bonds (BB-/BB-) at 10%.

Credit Suisse and Citigroup will act as joint bookrunners for the deal.

A roadshow for the deal ended Oct. 8.

Grupo KUO is a Bosques de las Lomas, Mexico-based holding company engaged in the manufacturing of auto parts, chemicals and food products.

Kexim released talk in the Treasuries plus 120 bps area for its upcoming benchmark-sized issue (Aa3/A/A+), which may be worth up to $1 billion.

The global bond deal is expected to price Wednesday.

BNP Paribas, Merrill Lynch, Morgan Stanley and ABN Amro will bring the deal to market.

Kexim is a Seoul-based state run bank.

Colombia's Empresa de Energia de Bogota has mandated ABN Amro to act as the bookrunner for its new issue.

The company owns 98% of Transportadora de Gas del Interior SA, which priced $750 million on Sept. 26.

EEB is a Bogota-based producer and distributor of electricity.

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