Emerging markets up on Fed cut; high-betas sailing; new talk from Banco Mercantil

By Aaron Hochman-Zimmerman

New York, Oct. 31 - Investors had been waiting for another rate reduction like Linus in the pumpkin patch; but unlike the Great Pumpkin, Ben Bernanke and the Federal Reserve Board delivered a 25 basis point cut.

After an unsurprisingly slow morning, most emerging market prices jumped on the back of the cut, but did not take flight.

The big winners came in the high-beta arena where the credits "were already up and running," according to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

In Argentina, where the last bits of confetti are just being swept up after the election of Cristina Kirchner to the presidency, the discount sovereigns due 2033 tacked on another 2 points.

"People who have sort of been on the outside position are now being forced back in," Alvarez said about investors who shied from the high betas until after the Fed decision.

There was "a little bit better selling, really across the board," said Erich Bauer-Rowe, Jefferies head of emerging markets who kept a positive outlook on the sector.

"The market will continue to be in good shape," he said.

In the primary, most issuers continued to wait for the market to show direction, yet Banco Mercantil do Brazil SA released new talk of 8 5/8% to 9% for its upcoming $100 million offering.

Volatility spiked at the time of the rate cut, but fell sharply and ended the day down 2.54 at 18.53, according to the VIX index. The index is the accepted yardstick of market volatility.

Emerging markets as a sector tightened down significantly as a U.S. Treasury sell-off narrowed JP Morgan's EMBI+ index by 10 bps to 186 bps.

Alvarez attributed the tightening to "strength in high beta and a diving 10-year note in the U.S.," he said.

The EMBI+ gauges the amount of yield investors require to keep money in emerging markets debt.

Europe tightens pre-cut

Emerging Europe's trading day carried on before the benefit of the rate cut, but still "spreads are tightening," according to Bauer-Rowe.

"We're seeing buyers come back," he said.

While investors in the United States were enjoying the lift from the cut, headlines came from Turkey where prime minister Recep Tayyip Erdogan toned down the possibility of an incursion into northern Iraq, at least in the near term.

The Turkish cabinet is also expected to announce a series of sanctions against Iraq for failing to curb the activities of the rebel Kurdistan Workers Party (PKK), which is responsible for attacks against the Turkish army and police.

Turkey's government bonds due 2030 were spotted up about 0.45 at 158.80 bid, 159.25 offered.

In Russia, the Organization for Security and Co-operation in Europe (OSCE) has accused the Kremlin of "unprecedented" blockades on election monitors intending to observe Dec. 2 elections, reported the BBC.

The moves by the Russian government may severely limit "meaningful observation," the OSCE said.

Russia's sovereign bonds due 2030 dropped off 0.25 to 112.675 bid, 113.125 offered.

High betas flying in LatAm

Trading in Latin America has been "pretty one-sided," IDEAglobal's Alvarez said.

Argentina and the oil credits are up, the other issues are pretty much flat, he added.

Argentina's high-beta issues, which had jumped on the presidential election results, continued to gain in price as the Fed easing lifted global markets.

Argentina's 8.28% government bonds due 2033 were quoted up 2 points to trade at 101.30 bid, 101.90 offered.

Venezuela benefited from both the high-beta surge on the rate reduction and the almost $95 per barrel price of oil.

"Consistency in crude oil is a strong underpinning," Alvarez said, adding that oil producers will continue to benefit from high prices.

The Venezuelan sovereigns due 2027 added about 0.5 and were spotted trading at 109.75 bid, 110.30 offered.

An even better investment than the sovereigns is the debt of government-owned PDVSA, a market source said.

The difference in price between the sovereign and the PDVSA bonds is not as significant as some would think, the source said, adding that PDVSA is undervalued.

The oil producer's bonds due 2027 were up 0.65 trading at 65.50 bid, 66 offered.

Traditionally more stable issues such as Brazil and Colombia did not see the same payday that the more volatile credits did.

Brazil's bonds due 2037 held flat for the session at 115.50 bid, 116.10 offered.

However, as most of the Latin American currencies have been appreciating against the dollar, Brazil's real hit the milestone of 1.75 on Tuesday.

The real was seen slightly off from its high at 1.738 to the dollar.

Colombia's sovereigns only managed a gain of 0.125 and traded at 114 bid, 114.65 offered.

In Asia, cut mostly priced in

Many market watchers felt that a 25 bps cut was already priced into the market. Asia's more stable benchmarks proved the theory by trading flat to mildly weaker ahead of the Fed announcement.

The Philippines' benchmark bonds due 2030 fell 0.125 to close at 134.125 bid, 135.125 offered.

In Indonesia, the government notes due 2017, which have been statuesque in their ability to hold a steady price, softened by 0.25 to 105.25 bid, 106.125 offered.

Pakistan saw more bloodshed as a police station was attached by rockets Tuesday night in the northern province of Swat, where pro-Taliban militants have a foothold.

The Pakistani bonds due 2016 were barely traded and showed a bid-ask range between 90 and 95.

Pipeline still open

"We saw very little action in the primary today," a portfolio manager said.

However, the pipeline did not shut down entirely.

Late Tuesday, China's Coastal Greenland Ltd. priced its $100 million five-year guaranteed senior notes with warrants, with a coupon of 12% through HSBC.

In addition to the $100 million sold publicly, $50 million was placed with Shenhzen Investments Ltd.

Also, Banco Mercantil do Brazil SA released new talk of 8 5/8% to 9% for the planned offering of $100 million three-year bonds (Ba2/B/), according to a market source. Previous talk was 8¾% to 9%.

UBS has been mandated as the bookrunner for the issue.

Pricing is expected Nov. 1.

Banco Mercantil is a Sao Paulo-based retail and commercial bank.

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