Latin America wider; market reels from U.S. job loss; Gazprom benchmark rumored

By Aaron Hochman-Zimmerman

New York, Sept. 7 - Emerging market watchers were more inclined to keep their risk exposure down, at least until Monday, in order to fully evaluate the effects of the loss of 4,000 jobs in the United States during the month of August.

Trading was almost stagnant as volatility rose and investors were still plagued with questions over where the market is headed.

"We'll take the weekend," a trader specializing in European corporates said about the reluctance of investors to expose themselves to any risk until the dust settles from the U.S. job loss numbers in what are already highly volatile markets.

The negative jobs data came as a surprise and it came in stark contrast to the expectations of economists who predicted a gain of approximately 110,000 jobs. The loss is the first time since August of 2004 the United States posted month-to-month job losses.

The trader said the news gives Federal Reserve chairman Ben Bernanke "the ammunition" to cut interest rates.

"Now's he's got an excuse," the trader said.

"The general opinion has changed in the last 10 days to almost unanimously the Fed will cut rates," the trader said.

Although, "I don't necessarily believe that," the trader said.

If more "dreadful" data is released and the Fed does raise borrowing costs in response to worries about a recession in the United States, "at least people can see the problem more clearly then," the trader said.

Many believe that the Fed may cut rates even before its next scheduled meeting on Sept. 18, a market watcher said, adding that many people who had expected a 25 basis point cut now expect a 50 bps cut.

EM spreads wider

Trading was quiet as JPMorgan's closely watched EMBI+ index widened out 7 bps and closed at 237 bps.

U.S. Treasuries weakened with the two-year Treasury note out by 12 bps to finish at 3.90%.

"It was very silent after the surprise data," Enrique Alvarez, the head of Latin American debt strategies for IdeaGlobal, said of the level of activity in emerging markets Friday.

"It hasn't even really drifted," he said about the lack of trading.

"The more liquid names are the only ones which are trading," a syndicate official commented.

Among the names seen trading was Russian mobile phone company Vimpelcom, according to a trader.

"You can theorize and analyze these companies to death," added a second trader, who noted that, despite extensive research, current market conditions make playing in even the most liquid and best known names a risky prospect.

"That does not mean that it can't get cheaper by 20% next week," the trader said about the futility of taking short-term positions at the moment.

"That puts a trader out of a job, that's unacceptable," he added.

LatAm weak with Brazil on holiday

Latin American debt widened out as U.S. stocks took a pounding, with both sectors responding to the U.S. Labor Department's release of August's job loss data.

The Dow Jones Industrial Average finished off the week with a drop of 249.97 in the final session to 13,113.38. The Nasdaq Composite Index dropped 48.46 to end the session at 2,565.70.

"The outlook for the market is still very hazy," Alvarez said.

Emerging markets is "too overwhelmed" and has been too "tied in with the directionality of the Dow," he said.

"There are definitely negatives to be construed," Alvarez added.

Argentina, Ecuador lower

Among specific names, the high-beta credits that have been most prominent in recent sessions were once again at the forefront of market moves Friday.

Argentina's 8.28% notes due 2033 were off about 0.90 as its spread widened out by 21 bps.

The spread widened even as president Nestor Kirchner said his wife Cristina, who is the front-runner in October's presidential elections, promised a budget surplus of 4% if she is elected, according to the Buenos Aires Herald. The report did not mention new taxes, but did claim that the first lady feels the government is currently spending more than it can afford.

Ecuador's 10% notes due 2030 were off 0.5 point finishing the trading session around 87.5.

Venezuela's 9¼% notes due 2027 were also down approximately 0.5 point to end at 97.75.

Mexico's benchmark 10-year sovereign peso bond fell 0.12 point to 100.95, as its yield came up 2 bps to 7.84%, a market source said.

Due to its heavy dependence on trade with the United States, Mexico is feeling the sharp effects of the non-farm payroll data released Friday on top of suffering from the slowdown in construction in the United States.

Brazil looks strong according to one market source but with Friday's holiday in that country was not available to provide leadership to the secondary market Friday.

"I expect that to change on Monday," Alvarez said.

The market was closed as Brazilians celebrated their Independence Day.

Asia's even keel

Over the course of the credit crunch, which has worsened to the point of talk of a recession, Asian credits have remained fairly isolated from the global lack of liquidity, and have been "this year's best performers," according to research group EPFR Global.

"Investors and fund managers are now judging emerging markets on their own merits rather than seeing them as a tail wagged by the U.S. and Eurozone economies," said EPFR Global managing director Brad Durham in a press release.

"In addition to the fact these markets are now getting some of the safe-haven flows, we're seeing a shift to quality within the asset class, and that quality, as far as investors are concerned, is in Asia," Durham added.

Year to date, Asian equity funds excluding Japan, have gained 30.7% as compared to 6.3% for global equity funds and a 5.4% loss for Japanese funds. Asian funds posted $1.25 billion of inflows this week which raises the year to date total to $4.74 billion.

Meanwhile in India, the benchmark 7.49% notes due 2017 lost 4 bps and ended trading at 7.49%.

South African sovereigns hold

Another place largely unaffected by the disappointing job loss number from the United States was South Africa.

The noted sovereign R153 bond was seen quoted around 9.35%, up slightly from Thursday's close at 9.34%.

The R196, a short-term issue closed up at 9.61% from 9.60%, while the long-term R157 also closed up around 8.70% from a previous close around 8.65%.

The rand itself strengthened to 7.23 to the dollar from 7.18 on the coattails of the oncoming yen, and avoided being dragged down by the weakening dollar.

South Africa has largely been able to avoid fallout from the U.S. subprime crisis based on its own strong fundamentals, a market source said.

Primary still breathing; $30 million inflows

In the primary market arena investors have all seemingly taken their ball and gone home, although emerging market bond funds did manage to take in inflows for the second week in a row to the tune of $30 million, according to EPFR Global.

There is also talk about a benchmark eurobond issue from Russia's new issue celebrity, OAO Gazprom. The transaction, expected via Citigroup and Societe Generale, is planned for October.

Despite the rumors from the Russian oil behemoth, the typical summer slowdown gave no sign of letting up in the first week back from the U.S. Labor Day holiday. Emerging markets took further damage Friday with the news of job losses in the United States.

"[The primary market] is as good as dead till year end," said a syndicate desk official who specializes in Latin American issues.

"I certainly hope I am wrong, but the new issue market is going to be very, very slow," the syndicate official added.

It seemed that the optimism which held on for so long through the summer months has outlived its usefulness.

"It's pretty bad really," said another syndicate desk official who specializes in emerging Europe.

"EM is in the same state as every other market," the official said, adding: "The market is closed."

"If you want to play you are penalized," said a trader specializing in European markets about new issues.

"It just stopped on a sixpence," the trader said.

"There's a lot of names ready to come to market," but "we need more stability," the trader added.

The VIX index, ringing up U.S. job loss figures, jumped 2.50 to close at 26.49 for the week.

"They've been gripped by the fear," the trader said.

Possible Gazprom benchmark

Gazprom is projected to offer a benchmark eurobond through Citigroup and Societe Generale, according to a syndicate source.

The issue is expected in October.

Gazprom priced a 7.288% $1.25 billion 30-year bond (A3/BBB/BBB-) on Aug. 8 at par with a spread of 225 basis points over 30-year U.S. Treasuries.

The government-controlled energy firm is based in Moscow.

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