Emerging markets trading hits August lull; ICICI Bank price talk

By Reshmi Basu and Paul A. Harris

New York, Aug. 12 - Emerging market debt stayed in hibernation Wednesday as the August lull continued.

"Trading was pretty boring," said a trader. "Not much going on. It's pretty quiet - just a generic-like August."

"It's trading in a range, not much price difference at all in anything."

Credits such as Brazil and Mexico firmed up after Tuesday's statement from the Federal Open Market Committee but the moment was fleeting.

"In the afternoon [Tuesday], Brazil was up about half a point. And Mexico tightened a couple of basis points, but after that it's been pretty quiet and stable.

"Nothing too much going on."

Overall, the JP Morgan EMBI Index fell 0.19% during Wednesday's session. Its spread to Treasuries widened four basis points to 460 basis points.

Most of what activity there was took place in Brazil. For the day, Brazil was mixed. The C bond was bid at 95, down 0.375 while the bond due 2040 added half a point to 100.3 bid.

ICICI Bank price talk

In primary action, India's ICICI Bank Ltd. set price guidance for its planned offering of $300 million five-year fixed-rate senior unsecured notes (Baa3/BB) at Treasuries plus 165 to 175 basis points.

"This could be a litmus test for other Indian issuances," said another trader. "More may follow if this deal does well - which I imagine it will."

The issue is expected to price no later than Aug. 16.

ABN Amro, Bank of America and Deutsche Bank are running the Regulation S deal.

And more details surfaced regarding Singapore's United Overseas Bank's plan to sell $1 billion equivalent of 15-year Tier 2 capital bonds.

The financial institution will sell U.S.-dollar and Singapore-dollar denominated bonds, with tranche sizes to be determined.

JP Morgan is the global coordinator.

Merrill Lynch & Co. will lead the U.S.-dollar tranche. United Overseas Bank, Citigroup and JP Morgan will lead the Singapore-dollar tranche.

The notes will come with 10 years of call protection.

Timing is subject to regulatory approvals and market conditions.

Impact of Fed statement

Meanwhile, one strategist said the full implications have yet to be felt in emerging markets from the Federal Reserve's move to raise interest rates 25 basis points on Tuesday and its bullish statement on the U.S. economy - and its continued "measured pace" strategy regarding rate hikes.

The Fed has guaranteed that interest rates in the United States will reach higher levels, negatively impacting emerging markets, according to a Latin American debt strategist at Refco EM.

"But we have not seen a lot of weaknesses in prices since the Fed took action yesterday [Tuesday]," the strategist said.

"I think the sentiment of the market changed on Friday after the job creation report. And it has not changed back," he added.

Although higher interest rates mean more risk, the current market perception is that there are some benefits in playing in emerging markets because of the improvements in local economies, he added.

"You have countries like Venezuela and Ecuador reaching their highs in the last six months due to the price of oil."

Venezuela has firmed on the price of oil and has not been hurt the Fed's hawkish stance, he noted.

Venezuela seeing little damage from recall

Meanwhile, the political noise from Venezuela's recall referendum has done little to dampen its paper, although investors are cautious moving ahead.

This Sunday, populist leftist leader President Hugo Chavez faces a recall referendum.

To recall Chavez, the opposition must equal or beat the 3.76 million votes he received when he was reelected in 2000.

If Chavez loses the referendum, a presidential election will be held within 30 days.

"The sentiment of the market is very interesting," said the Refco EM strategist. "You see some of the important fund managers taking positions ahead of the referendum."

The market perceives that Chavez has instilled stability in the country. Venezuela has received a push from factors such as an improving economy and the repurchasing of some of its obligations.

"Overall, it's a very positive tone in reference to what Chavez has done in the past six months - taking advantage of the cash inflows into the country due to the high oil prices," he noted.

"On the other hand, you have the referendum that will take place this weekend and definitely has the potential to disrupt the political situation in the country."

The market wants a referendum that clearly states the winner.

"If Chavez wins, the market will welcome that as long as it's a clean election," the strategist said.

"Now, what you don't want to see is an election where both parties go on the street and start creating some social unrest due to accusation of fraud, " he said.

Nonetheless, if the price of oil stays at its current high levels, Venezuela will perform well because of the substantial cash flow.

The Venezuela bond due 2027 was bid at 91.10, up 0.10 in trading Wednesday. The bond due 2034 was down a quarter of point to 90 bid.

Argentina's standoff with IMF

On Tuesday, Argentina said it would delay its talks with the International Monetary Fund until at least December so that it can concentrate on its negotiations with angry creditors over its 2001 default.

"We cannot take up negotiations again until the end of December or January because that would interfere with the debt exchange offer,'' said economy minister Roberto Lavagna at an America's Council conference in Buenos Aires.

Argentina is drawing on reserves to avoid defaulting to multinational lenders after the IMF withheld a $728 million payment in July. The IMF has been displeased with the progress over negotiations over its 2001 default.

"In the case of Argentina, the last exchange of opinions is nothing new. The standoff has meant negative repercussions for the price of it sovereigns and some of its corporates," the strategist said.

"I think this is a long progress. We are not going to see an improvement over the situation in the short term.

"The market believes that the government is not committed to offering creditors an attractive package," he added.

"We will be hearing a lot more noise about this in the coming months.

"They have some loans to pay off in the next few months. That will create some more pressure within the country to pay them or not pay them," he added.

The Argentina bond due 2008 was bid at 27.3, down 0.075 Wednesday.

Mexican corporates flat to slightly lower

In secondary trading, Mexican corporate bonds were flat to slightly lower compared to earlier in the week.

Mexico's cable company Innova bond due 2007 was unchanged at 101½ bid, 103½ offered from Monday's session.

Railroad company Grupo TFM's bond due 2012 was down half a point to 108 bid, 111 offered from Monday's bid of 108½ bid, 111 offered.

Brazil corporate bonds were mixed.

Beverage producer and distributor Ambev's bond due 2013 was up quarter of a point at 110 bid, 111 offered from Monday's 109¾ bid, 111¾ offered.

Petróleo Brasileiro SA's bond due 2018 was down half a point to 96 bid, 97 offered from Monday's 96½ bid, 97½ offered.

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