Afternoon recovery saves day after morning slump; prices end little changed; primary waits

By Aaron Hochman-Zimmerman

New York, Oct. 22 - Emerging markets began the day with the same uphill battle that had begun Friday.

Yet, even on light volumes the luck began to change as the session progressed, leaving credits largely unchanged on the day.

The day was "fairly volatile at the bottom [with] decent buying into the afternoon rally," a trader said.

After a lackluster end to last week, the small pick up was not a surprise to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Stocks in the United States propelled bonds back from the morning's depths with some help from a 67% fourth quarter profit increase from Apple Inc., he said

Venezuela saw its 9.25% sovereigns lost 0.25, but that was a recovery from losses that had stretched to 1 point.

In the primary market, the only news came from Singapore's United Test & Assembly Center/Global A&T Electronics Ltd., which announced timing for its $475 million deal expected on Nov. 2.

The VIX index, which spent the morning continuing the climb it established on Friday, fell off for a loss of 1.32 in the afternoon to end at 21.64. The index is the standard measure of market volatility.

JP Morgan's EMBI+ index showed the emerging markets afternoon rebound by closing the day unchanged with a spread of 204 basis points. The EMBI+ gauges the amount of yield investors require to hold money in emerging markets issues.

Europe wider, watching Turkey

European issues widened by approximately 10 bps across the board, according to a trader. The volumes were light as investors tried to make sense of the events of last week.

The trader expects "more pain in the next couple of days," but if a rate cut from the Federal Reserve Bank appears to become more of reality "that will definitely improve things," he said.

The anxious eyes of investors are on Turkey as the Ankara government moved closer to an incursion inside the borders of Iraq.

Protestors in Turkey are demanding the government take action against the Kurdistan Workers Party (PKK) in response to an attack Sunday left 12 Turkish soldiers dead and eight missing.

The Iraqi government, which claims no ties to the rebels, said the group is ready to discuss a ceasefire.

Still, rhetoric from Turkey's prime minister Recep Tayyip Erdogan became more strident Sunday night after emergency talks.

Turkey will not allow the PKK to have a safe haven in northern Iraq "whatever the price may be," he said.

Investors are still expressing concern over where the conflict may lead, but as of yet no fallout has come from the skirmishing.

Turkey's government bonds due 2030 were quoted off 0.375 and trading at 155.625 bid, 155.875 offered.

In Russia the central bank's efforts to mop up excess liquidity will be a more difficult task than many had expected, a market source said.

The ruble will benefit in the short-term, but a declining GDP may weigh down the currency past the second half of 2008.

The ruble closed at 24.934 to the dollar.

The Russian sovereign due 2030 was seen trading up at 113.0625 bid, 113.125 offered.

LatAm stronger on light trading

Latin American trading continued the drop off from the risk aversion seen on Friday as "bids were soft early morning," according to Alvarez.

The credits made their comeback on the coattails of the rally in U.S. equities, Alvarez said.

The positive moves late in the day were not enough to create big gains, but only to leave bids mostly unchanged on the day, he said.

In Argentina the likely election of first lady Cristina Fernández de Kirchner as president on Wednesday will provide some stability to the economy which has begun to deal with an energy crisis, a market source said.

The economy will continue to grow, but likely at a slower rate, the source said as the danger for the country is rising inflation.

The inflation rate remains over 9% despite government efforts to combat commodity price increases.

"Whatever nervousness was going to come [from the election], you've already seen that," Alvarez said.

"You still have volatility embedded in most Argentine credits," he said, but it is not increasing because of the upcoming elections.

The high-beta 8.28% sovereign bonds due 2033 were up approximately 0.50 to trade in the neighborhood of 94 bid, 94.4 offered.

Brazil has been busy both repurchasing its external debt and passing legislation to allow more foreign investors to bring money into the country.

Along with its reduction in its dollar-debt and opting for fixed rate over floating interest rate issuance, Brazil has put itself very close to an investment grade category, a market source said.

In its attempt to reach investment grade status, the country has built a reserve of $143 billion.

The Brazilian sovereign issues due 2037 were seen trading up 0.15 at 114.75 bid, 114.90 offered.

In Venezuela, the new policies pushed forward by president Hugo Chavez, which have been called increasingly "centralized and socialist," have increased the country's dependency on its oil wealth.

The government has seemingly turned its back on foreign investment and the maintenance of the economy aside from oil, a market source said.

The inflation rate would be over 25% if prices were not so strictly control, the source said.

Oil's $86-per-barrel price, which dropped on the day, but in the larger sense shows no sign of letting up, has kept its cash reserve in the neighborhood of $70 billion, the source added.

Venezuela's 9.25% sovereigns due 2027 fluctuated wildly throughout the session, but like many issues found its way to back to where it started. The bonds were unchanged to 0.25 lower at 107.00 bid, 107.40 offered.

Asia shows mild bounce

Asian trading also turned in a mixed to positive day in what may have been a reaction to the drop off during last week.

In Indonesia government reforms have put its sovereigns in a good light, according to a market source. Moody's agreed by upgrading the country to Ba3.

The government bonds due 2017 are a "favorite pick," the source said, who added that the notes offer room for spread compression.

The government of the Philippines has recently struggled to maintain its financial victories.

The surplus it claimed was revealed to be based on one-time privatizations, a market source said.

Still, the economy benefits from the more than $1 billion Filipino workers around the world send back annually. The country's FX reserves are estimated to be $30.7 billion.

Sluggish primary produces little

The primary saw only a timing update from United Test & Assembly Center/Global A&T Electronics Ltd. while a benchmark issue from Colombia's Empresa de Energia de Bogota is expected shortly.

UTAC announced the timing and structure for its $475 million equivalent two-part notes offering on Monday.

The semiconductor testing and assembly company plans to sell eight-year second-lien notes in dollar-denominated and euro-denominated tranches.

The notes will come with four years of call protection.

The deal will be marketed this week on a roadshow in Asia, Europe and the United States. Pricing is expected on Nov. 2.

ABN Amro, JPMorgan, and Merrill Lynch are leading the deal.

Proceeds will be used to fund the buyout of the company by TPG Capital and Affinity Equity Partners.

The subprime crisis does not seem to be done with the emerging markets primary, said an emerging markets strategist.

New issues are still at "depressed levels," he said.

So far this year, it's the corporates which have made up some ground where the sovereigns have lost.

"Corporate issuance has already exceeded 2006 issuance levels by $16.5 billion and continues to surpass the level of sovereigns," the strategist said.

"Corporates represent 81% of all issues brought to market this year, sovereign issuance is

down $21 billion [or 37%] from 2006," he added.

"There has been a pick-up of activity in October [although,] it remains well below norms for prior months this year," he said.

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