Emerging markets lower but hanging on; light trading, watching banks; $2.4 billion added to calendar

By Aaron Hochman-Zimmerman

New York, Nov. 2 - Emerging markets debt widened out slightly in trading Friday, but comparatively held its own on a day of light volumes.

Investors seemed ready to put an end to a volatile week full of bad news and "huge buckets of uncertainty," a trader said.

In the primary, Indonesia announced a $2 billion deal intended for 2008 as China's Agile Property Holdings Ltd. came with a $400 million offer. The rest of the primary called it an early weekend.

In the secondary, "it was the usual suspects," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, talking about who made the most noise in trading.

Argentina and Venezuela took the lead for the sovereigns on the way down, losing 0.5 and 0.9 respectively from their benchmark sovereigns.

Still, neither issue has entirely lost the gains it took on from the brief rally which began the week.

Despite the souring sentiment from many market watchers, "nothing has really changed," said Jefferies & Co.'s head of emerging markets, Erich Bauer-Rowe.

Emerging markets widened by approximately 10 basis points across the board during the session, he said.

There has been a trend of a rash of bad news followed by a week of uncertainty, he said, adding that when the market settles down "we're going to be OK," he said of emerging markets.

Yet in the larger financial world the financial sector is the cause of many headaches.

"This financial system is about to implode on us," a trader said, citing concerns over reports that Merrill Lynch may have been hiding its losses in hedge funds.

"If that's true, that's an awful symptom of what's out there," Alvarez said about the Merrill Lynch rumors.

"I am of the camp where I think the U.S. investment banks and financial community have some real problems on their hands," he said.

Emerging markets have been cloistered to some degree from the banking crisis, but it has created a new situation with the major developed markets as the source of volatility and uncertainty, the trader said.

"The methods by which you try to figure out what's going on just do not apply any more," he said.

"It makes any kind of trading or risk management far more abstract," he said.

Although volatility reached over 25.00 in the late New York morning, the VIX index closed the day down 0.20 to end at 23.01. The VIX index is the accepted measure of volatility in the broader market.

Emerging markets widened out by 4 bps as a sector, according to JP Morgan's EMBI+ index. The index, which gauges the amount of extra yield investors require to hold emerging markets debt, finished the session with a spread of 202 bps.

Asia prices down, jitters up

Asian trading volumes were low, "but the markets were absolutely all over the place; there are so many people who are nervous out there," a trader said.

Although prices were not knocked much lower, sentiment suffered significant damage.

"You could feel a demonstrative difference," the trader said.

In the Philippines, the benchmark bonds added 0.375 to close at 133.625 bid, 134.125 offered.

In Indonesia, where the government recently announced it would sell $2 billion more in debt sometime next year, the sovereign issues due 2017 added 0.625 and finished at 105 bid, 105.5 offered.

Pakistan's bonds due 2017 which has been difficult to gauge due to the intense political volatility, the trader said, were seen at a bid of 91 during overnight trading, which was 1 point higher than Thursday's close. The volatile day ended as a wash, with the a close 91 bid, 92 offered.

Asia rolls out new issues

In the primary the Republic of Indonesia (Ba3/BB-/BB-) announced it will offer $2 billion over a 10- and 30-year tranche.

The deal is expected to be brought to market early in 2008.

Elsewhere, Agile Property Holdings Ltd. will begin a roadshow on Monday in preparation for an upcoming $400 million senior secured bond (Ba3/BB/) issue.

The deal which will be repaid as a bullet, will be brought to market by HSBC.

Agile is a Hong Kong-based real estate developer.

Bank trouble quiets Europe

Back in the secondary, there was "virtually nothing going on" in emerging Europe, according to one trader.

Spreads were widening and liquidity was down, the trader said, but it has been a "gradual widening without any real capitulations."

Problems in Kazakhstan and the banking sector have been the storm clouds for emerging Europe, he said, adding that there are rumors of large writedowns coming from Goldman Sachs and "Merrill doing something slightly underhanded."

Also, Barclays may be considering asking for help from the Bank of England, he added.

"Banks everywhere are an obvious a pile of crap," he said.

There are bright spots and they are coming from Russia in non-banking corporates he said, calling them "absolutely solid."

However, the Russian first deputy prime minister Sergei Ivanov leveled accusations at the Kiev government for what he called "inaction" after the former chief of the Kremenchuk oil refinery in the Ukraine forcibly reinstated himself backed by armed police.

The former chief, Pavel Ovcharenko, claimed a court order restored him to his former position.

Shortly after, Russia suspended oil deliveries to Kremenchuk sparking worries over a new energy dispute between Russia and the Ukraine.

Still, the sovereign issues are "doing fine," the trader said, although "it all feels fragile."

The Russian sovereigns due 2030 were quoted up 0.20 at 112.95.

In Turkey, visiting U.S. Secretary of State Condoleezza Rice declared the Kurdistan Workers Party (PKK) a common enemy of the United States and Turkey.

The United States, which has already supplied "actionable intelligence" to the Turkish military on the eve of a possible Turkish incursion into Iraq, pledged to support Turkey in its fight against the PKK rebels.

The Turkish parliament has already approved a series of economic and military sanctions against Iraq on Wednesday, but no details have been released.

The Turkish benchmark sovereign due 2030 was quoted down 0.375 to trade at 158.125 bid, 158.375 offered.

LatAm prices lower, volume slower

Latin America was "a touch lower," IDEAglobal's Alvarez said about a day which saw little trading.

However, into the coming weeks if the current conditions persist there may be a movement toward debt and away from equities if the current trends continue, he said.

In trading, the high-beta credits fell first, ahead of the more stable issues, but still manage to stay above the prices they posted before the Argentine presidential elections.

Argentina's 8.28% discount notes due 2033 dropped 0.50 to 99.7 bid, 101 offered.

Venezuela's 9.25% government bonds were lower by 0.90 and quoted at 108.60 bid, 109 offered.

Despite the loss on the session, the oil producer's debt continues to enjoy relatively high prices from the $96 per barrel level of light sweet crude.

In Brazil, where the real recently set a record against the staggering dollar, the sovereigns due 2037 were seen off by 0.375 trading at 114.90 bid, 115.25 offered.

The real was seen at 1.755 to the dollar.

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