EM hit again, recovers in afternoon; Argentina dives, Venezuela floats; Country Garden, 3 others postpone

By Aaron Hochman-Zimmerman

New York, Nov. 8 - Emerging markets made up for some early losses on another day full of financial sector landmines.

In the primary market, the hatchets came out for four deals including China's Country Garden and the JSC Development Bank of Kazakhstan which both pulled benchmark-sized deals. Singapore's United Test & Assembly Center pulled a $475 million deal and Brazil's Grupo Unialco pulled a deal for $150 million.

In trading, among the high-betas Argentina led the retreat, seeing a 1.625 drop in its 8.28% discount bonds due 2033.

Many other credits clawed their way back to unchanged levels after a morning which saw Federal Reserve Bank chairman Ben Bernanke tell Congress that the U.S. economy will go through further hardship before the end of the year. In addition, Morgan Stanley became the latest of the major banks to report unfortunate numbers as it announced a $3.7 billion reduction in net income from sub-prime mortgages in the two months to Oct. 31.

"There has been liquidation in the market; it's the fast money which got nervous about it," said Jefferies & Co.'s head of emerging markets Erich Bauer-Rowe about the jitteriness seen during the day's trading.

"It paints a picture that we're going to continue to have volatility in the market," he said.

"It put into perspective that it's not always going to be a one-way street," he said.

Volatility reversed its early climb as well, despite the sour headlines. The VIX index dropped 0.33 to close at 26.16. The index is the accepted yardstick of market volatility.

As a sector, emerging markets made up for early losses in the afternoon bringing the EMBI+ index up to an unchanged spread of 215 basis points. JP Morgan's EMBI+ index gauges the amount of extra yield investors demand to keep money in emerging markets debt.

Yen moving wrong way for LatAm

Latin American trading suffered through another day of poor headlines and a declining dollar.

The sector, which has traditionally drawn support from the yen-dollar carry trade, is watching some of the arbitrage advantage evaporate as the yen gains ground on the sinking dollar.

"Eventually a cheap dollar on a [purchasing power parity] basis will result in a recovery," an emerging markets strategist said.

However, "this could take time and will unlikely happen before U.S. elections next year, hence dollar selling now."

"If [yen] appreciation proves sustained, then [yen] carry allure will be reduced," he said.

Still "I imagine something else will take its place," he said.

"Several EM FX rates are appreciating also, so relative to the [yen] there hasn't been much depreciation, rendering the pure carry trade still valid," he said, adding that there is "just not much capital appreciation behind it."

Mexico's peso and Argentina's peso might see some carry trade unwinds if the yen really does continue on its present trajectory, he added.

Meanwhile, back in the credit market, "spreads in the high-beta market are really high [Thursday]," said Jefferies' Bauer-Rowe.

Rollercoaster credit Argentina led the losers with a decline of 1.625 in its 8.28% discount bonds due 2033. The bonds were quoted at 95.625 bid, 96.125 offered.

In Venezuela, one student protestor was killed and others were injured by plain-clothes gunmen during a peaceful demonstration against president Hugo Chavez's political reforms in Caracas, according to a CNN report.

Chavez hopes to repeal presidential term limits and to give himself, as president, greater control of the nation's bank and oil industry.

The country's 9.25% sovereigns due 2027 managed to add 1 point to go home at 105 bid, 105.5 offered.

Consistently steady Brazil fell 0.35 on the session to trade at 113.15 bid, 113.4 offered.

Pipeline losses four in primary massacre

The primary market saw four deals put back on the shelf amidst strong mood swings in the market.

Chinese property developer Country Garden postponed its dollar-denominated benchmark bond offering (Ba1/BBB-) due to market conditions.

Morgan Stanley and UBS were bookrunners for the deal.

Development Bank of Kazakhstan postponed its benchmark-sized dollar-denominated 10-year notes (A2/BBB-/BBB) due to unfavorable market conditions.

The issuer "will instead utilize other attractive funding sources," according to a statement from the bank.

Deutsche Bank and JP Morgan were scheduled to bring the deal to market.

DBK is a government controlled, Astana, Kazakhstan-based development bank.

Singapore-based United Test & Assembly Center (UTAC) and Global A&T Electronics Ltd. postponed their $475 million two-part offering of eight-year senior second-lien notes (B1/B+).

JP Morgan, Merrill Lynch and ABN Amro were leading the deal.

Proceeds had been designated to fund the buyout of the company by TPG Capital and Affinity Equity Partners.

UTAC is a semiconductor testing and assembly company.

Brazil's Grupo Unialco announced it has pulled its $150 million intermediate bond issue (B2/B/).

The company also cited "deteriorating market conditions" in its decision to pull the deal which had previously been talked at 10%.

ABN Amro had been asked to act as bookrunner for the deal.

Unialco is a sugar and ethanol producer based in Guararapes, Brazil.

"Quiet day ... surprise surprise," a syndicate official said.

Some deals survive

Other issuers were not too frightened to proceed with their own new issues.

Panama's Newland International Properties, is now expecting to price early Friday, according to an informed source.

"The book is in pretty good shape," the source said.

Asia 'all over the map'

Asia moved wider as the "credit markets remain under tremendous pressure here," a trader said.

Some issues were able to move past the breakeven point on the afternoon equity rally, but "in general the market still doesn't feel healthy," he said.

"It's all over the map."

"We're definitely expecting more negative headlines," he said.

The Philippines' sovereign bonds were seen up 0.25 at about 131.5 bid, 131.75 offered.

Indonesia's benchmark sovereigns were quoted off 0.25 at approximately 103.75 bid, 104.5 offered.

In Pakistan, facing internal agitation and pressure from the international community, president Pervez Musharraf announced that elections will be held sometime before Feb. 15, 2008.

Musharraf also agreed to resign from the army if he wins another term as president.

Former prime minister Benazir Bhutto responded by saying that setting an election date does not go far enough to repair the damaged caused by the state of emergency in Pakistan. Bhutto, the head of the Pakistani People's Party (PPP) also demanded that Musharraf release political prisoners taken during the week's demonstrations and restore the constitution.

The setting of a polling date and the promised resignation from the army may not have satisfied Bhutto, but it did give investors more confidence in the credit, a trader said.

The Pakistani sovereigns due 2017, which have been difficult to pin-point, were up approximately 2.5, trading at 85.5 bid, 87.5 offered.

"The bonds seem to have found a floor," he said.

Emerging Europe slips lower

Emerging Europe was lower after a gloomy day in the market, but it did not see the wide spreads shown in the high-beta market.

Turkey's bonds dropped as its lira continued to fall against the dollar, making it a sought-after carry trade currency.

The country avoided more political headlines, especially since an incursion into northern Iraq is now widely expected.

Still, the benchmark government bonds due 2030 fell again by 0.625 to trade at 157.75 bid, 158.25 offered.

The lira was spotted down to 1.190 against the dollar.

In Russia, the sovereign bonds due 2030 held on unchanged at 112.75 bid, 113 offered.

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