Emerging market debt softer on profit taking; Brazil leads downturn; wait and see mode

By Reshmi Basu and Paul A. Harris

New York, Oct. 25 - Friday's bearish tone carried into trading Monday as emerging market debt was softer on profit taking.

"It looks like the market has been following Friday's close," said a buyside source.

"Brazil is wider. Philippines is wider - [everything] pretty much across the board is wider."

The source added that prices weakened towards the end of the day.

"It was actually mostly profit taking here and there. Some real money reducing positions," said the buyside source. "Probably 90% Street-driven flow."

Brazil led the downturn. The C bond lost 5/8 to 97 7/8 bid at Monday's close while the bond due 2040 was down 1½ to 109½ bid.

Mexico's bond due 2008 fell ¼ to 114½ bid while the Venezuela bond due 2027 was down 1.15 to 100.25.

"There was definitely profit taking, so prices were down 100 to 150 basis points on the whole Latin curve," said a Latin American debt strategist at Refco EM.

"Brazil was leading the correction."

"In contrast to the Treasuries in the U.S, emerging markets were decoupling from Treasuries in the past six, seven trading days - so that's different from what we were use to seeing a couple of months ago," he added.

U.S. elections, oil scare off buyers

In the week leading to the U.S. presidential elections and another release of non-farm payroll numbers, paper should be soft, according to the buyside source.

"I don't see any reason for it to rally. We haven't yet seen anybody stepping in and buying at these levels. I think everyone is waiting for cheaper levels to invest again," added the source.

The first concern for the market is the neck and neck race in the polls between presidential candidates George Bush and John Kerry, which is creating a climate of risk aversion, noted the Refco EM strategist.

"Second of all, oil prices are another factor. Although it benefits some countries in emerging markets, it also puts pressure on the overall economic development," he said.

"Emerging markets are also consumers of oil and at these prices, it's a factor to take into account."

"The third factor is commodities. Although it had little impact on Monday's session, it is becoming an undercurrent in the market," said the strategist.

"Last week, China reported economic numbers which show the economy is soft landing, although consumption and demand of commodities is strong.

"That is also playing in emerging markets," he said.

About half of total exports of Latin American countries are related to commodities.

"The performance of China, and the U.S and Europe overall, weighed in the balance of payments of all these countries.

"China is now one of the largest importers of oil, steel, copper and paper.

"Brazil is an exporter of all of these."

Wait and see mode

The tone of the market is wait and see, according to the buyside source.

"The only news is the rumors of an improvement in the Argentina's debt offer.

"And the negative news on the Philippines' fiscal accounts.

"Other than that, there's nothing driving this market. We are all looking to the U.S to see what happens there. And people will make up their minds on the asset class," said the source.

The Philippines Congress returned to session on Monday to debate reform measures to avoid a fiscal crisis.

President Gloria Arroyo has asked Congress to agree on eight revenue measures, which are expected to raise $1.48 billion.

The Philippines bond due 2024 fell 1 3/8 to 108¾ during Monday's session.

The debt strategist added that the soft market may continue during the next few sessions.

"It appears to be a market correction - not with the same drastic moves we saw a couple of months ago.

"For example, the Brazil '40s are almost down five points from last week.

"It's a minor correction, I would say," he noted.

Rumors of Russia exchanging USSR debt

There has been speculation that the Russian Finance Ministry may make an offer to exchange the former USSR's debt for Russian eurobonds this year.

"There have been rumors, but nothing has been confirmed," said the buyside. source.

"Initially, the rumor came out on Thursday and Friday. And they actually came back and clarified that wasn't the case, so the market came back.

"If it does happen, it will impact the market.

"But right now, it seems that Russia is pretty strong."

The Russia bond due 2030 was down half a point to 99¾ bid Monday, which the source said was a relatively strong performance compared to the overall weakness.

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