Jobs data delivers small bounce; Pakistan higher; new issue streak ends at seven days

By Aaron Hochman-Zimmerman

New York, Oct. 5 - Emerging markets bounced, but were not shaken up by U.S. non-farm payroll data on a day of light and lateral to positive trading.

The seven-day primary run of new deals finally came to an end on a day which combined an early market close with a Jewish holiday.

In the secondary, Pakistan outpaced the other sovereign issues, gaining about 1.00 ahead of Saturday's controversial presidential elections. In the high-beta arena, Argentina's bonds due 2033 picked up about 0.80 in the low volume trading.

The outstanding performer in emerging markets was actually JP Morgan's EMBI+ index. Not quite because of emerging markets themselves, but more due to the drop in U.S. Treasuries, the spread tightened 13 basis points to 188 bps. The index, which is used to gauge market performance, measures the amount of extra yield investors require to hold emerging markets debt.

"The non-farms were much hyped, but were right on target essentially," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"What is surprising is that following the Dow rally it did not feed into more risk absorption," he said.

"There was a small run up in bid prices before the release," he said, but after the release of "average" non-farm payroll numbers there was a "lateral drift ... not a lot of excitement in EM."

According to the U.S. Labor Department, 110,000 new jobs were added in September and August's data was revised to 89,000 new jobs created instead of the 4,000 drop originally estimated.

Still, "it's a complicated situation ahead," he said.

Because of the "average" data release instead of the weak numbers many had expected the Federal Reserve Bank may lose some of its impetus to cut rates, which is "a negative for the market," he said.

"We're at the mercy of Treasury yields," Alvarez said.

An emerging market strategist was happier with the news Friday morning.

"Provided there are no unexpected blow-ups in the investor world and earnings season does not yield surprises - which has historically pressured EM - we should see the bullish recovery continue for another week or two," he said.

The VIX index reacted well during the day's session. The accepted measure of market volatility was seen down 1.53 to close at 16.91.

Asia continues climb

Asian credits stayed on track as the region reacted well to the U.S. data release.

"Reactions have been quite positive, albeit on fairly light flows," a trader specializing in Asia said.

"Overall we're just seeing a slow recovery in most of the Asian credit markets," he said.

Prices were higher all over, but bonds in Pakistan did especially well "on the election news," the trader said.

Elections will go on, although the Pakistani supreme court is still deciding whether or not president Pervez Musharaff can seek re-election while holding his position as army chief. The results of the vote will not be announced until the court publishes its decision.

United States' ally Musharaff has allowed the pro-west former prime minister Benazir Bhutto, whom he had accused of corruption, back into the country where it is likely the two will reach an arrangement to share power.

Pakistan's sovereigns due 2017 were seen up around 1, trading at 93.

The Phillipines continues to react well to the recent rate cut by its central bank. The reduction, along with the U.S. data, helped push its government bonds due 2030 up 0.75 to close at 132.25.

Elsewhere, Indonesia's benchmark bonds due 2017 took part in the day's lift. The bonds gained 0.25 to finish the day's trading at 105.50.

Europe unmoved by data, Kazakh bank trouble

In Europe, trading was flat as the debate raged over the severity or even the existence of a bank crisis in Kazakhstan.

"EM is still holding at the moment," said a trader.

In Kazakhstan where "the state of the sector had been pretty weak" some yields tightened in overnight trading, he said.

The problems began with banks which were financed up to 52% by external investors, he said.

However, more recent comments from the central bank reassured many that they "have adequate means to support or stabilize" the banking industry, he said.

Still Standard & Poor's put the country's BBB rating on CreditWatch on Tuesday.

Property values in the former Soviet republic have dropped significantly, as much as 30% in some cases, said a market source.

As it is typical in many places, a great deal of the collateral held by the banks is in real estate, which has been on a steady slide.

The source feels the banks' eurobonds are too risky to buy, but because their spreads have widened so much the source cannot recommend selling either.

Many investors are taking the opposite approach.

"Kazakh corporate paper is looking increasingly interesting," an emerging markets strategist said about growth potential in the sector.

"The Kazakh bank sell off was overdone," an analyst said.

"They're a mess, but not plus 600 bps of a mess," he said, adding: "They'll recover somewhat next week as the panic fades, but they'll probably make some guys take another look at high-flying EM banking names."

With most of the news coming from Kazakhstan, benchmark sovereigns in emerging Europe traded quietly, up slightly on the bounce provided by the U.S. data.

Turkey's sovereigns due 2030 were seen better by 0.50, trading at 157.25 bid, 157.50 offered.

In Russia, as talks continue between the government run OAO Gazprom and the Ukraine regarding the payment of $1.3 billion for oil, Russia's government bonds were seen about 0.25 lower at 112.062 bid, 112.125 offered.

LatAm reacts well, Argentina recovering

Over the course of a slow week, most Latin American issuers were still posting slight gains, with the exceptions of Venezuela and Argentina. Still the latter has already shown that despite its persistently rocky politics, it can maintain its appeal.

"After the Argy rebound I'm looking for Vene to follow next week," said a strategist, who added that the high yield names in emerging markets should do well in the near term.

Argentina's rollercoaster 8.28% sovereigns due 2033 were back up to 91.80 bid, 92.50 offered Friday from 91 Thursday.

Venezuela posted gains of 0.25 to its 9.25% notes, which traded at 105 bid, 105.50 offered.

Brazil had a strong week as its highly watched 11% bonds due 2040 traded up 0.30 to 134.20.

A market source attributed Brazil's strength to continued investment which has bolstered both the country's GDP and its industrial output.

In Ecuador, where president Rafael Correa's party moved closer to enacting constitutional changes which will generate more revenue for the government from the export of oil, bonds gained another 0.25. Ecuador's 10% notes due 2030 finished the session at 93.75 bid, 94.75 offered.

New issue streak stops at seven

In the primary market, issuers finally let the spotlight drift back over to the secondary.

No deals managed to price, although the calendar showed Banco de Credito del Peru finished its roadshow Thursday.

The coming week's calendar also has more Latin American deals lined up, coming from Mexico's Grupo Kuo, Argentina's Impsa and Brazil's Odebrecht. The total value of the four expected to price is $810 million.

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