Emerging markets prices flat to stronger; sentiment lagging; primary holds off

By Aaron Hochman-Zimmerman

New York, Nov. 16 - Prices in the emerging markets were flat to slightly better Friday, but a sour tone permeated through the sector even as some of the benchmark issues gained ground.

Trading was light and liquidity was drying on the Friday of the week before the Thanksgiving break in the United States. No new deals were priced.

Emerging markets mutual funds gave up $185 million, for the week ending Wednesday, according to EPFR Global. The losses came "mostly from funds investing in hard currency issues after fears about the impact of a weaker U.S. economy and currency pushed the spread between U.S. Treasuries and JP Morgan's benchmark EMBI+ index over 220 basis points."

Friday, the EMBI+ index was wider by 7 bps to a spread of 234 bps. The index gauges the amount of extra yield investors demand to hold emerging markets credit.

Venezuela turned in the worst performance of the highly watched credits, with its benchmark sovereigns due 2027 dropping 0.75.

The primary market was next to silent, but added a Singapore dollar-denominated 10-year deal from Singapore's Overseas-Chinese Banking Ltd.

The highlight of the upcoming half-week will be Tuesday's release of the Federal Reserve Board minutes. In the days following there is a widely held concern that liquidity will be in short supply.

Whether or not the major banks will make a strong showing during their typical year-end push "will be a quite little barometer" for the market, a trader said.

"I can't imagine, given the nature of the concern, what could possibly take place to turn that around," another trader said about failing sentiment.

"We've seen problems in past years, but this is more structural," he said adding that the root is wider than just one country of one organization.

"This just seems to be so broad in its range," he said.

Writedowns and underperformances have been announced by the major banks, "but what about the other guys," he asked about the smaller institutions.

Even if a narrow group like the Russian corporates are in good health, "it's not going to stand as an island in isolation forever," he said.

"If we see the same pattern [next week] then we are going to have to get reassessed and repriced," he said.

"The most we can hope for is that there's no more scare stories," he said about the headlines which have pushed risk-aversion.

Still, volatility was down as equities improved. The VIX index fell off 2.57 to finish the day at 25.49. The index is the standard measure of market volatility.

LatAm mixed, benchmarks slightly better

Trading in Latin America "was a little mixed," according to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Many of the benchmarks were up, but we saw "the same negatives" as in Thursday's session, he said.

Rumors swirled around Ecuador over a possible swap of its bonds due 2030, but "I don't believe any of it," Alvarez said.

And "the rumor wasn't going to sustain any price advances," he said.

Ecuador's sovereigns due 2030 were seen unchanged on the day at 95 bid, 96.25 offered.

Confidence in Venezuela is dropping ahead of the Dec. 2 referendum on whether to increase presidential powers over the central bank and oil production.

Also, Spain has made attempts to patch relations with Venezuela after king Juan Carlos told president Hugo Chavez to "shut up" after Chavez's outburst at the Ibero-American summit in Chile on Nov. 10.

Spanish foreign minister Miguel Angel Moratinos said that Spain will protect its financial interests, but would not add fuel to the war of words between the countries.

The 9.25% Venezuelan sovereigns due 2027 were seen off 0.75 at 101.5 bid, 102.4 offered.

Argentina, which is bringing in revenue with a new tax on exported oil, saw its bonds record a mild advance. The 8.28% discount bonds due 2033 were higher by 0.45 at 94.45 bid, 95.45 offered.

Brazil's bonds picked up a small 0.2 to trade around 112.7 bid, 113.35 offered.

Its bonds due 2040 were spotted at 134.2 bid, 134.35 offered.

Emerging Europe slipping slowly

Another slow day in emerging Europe left a trader with the idea that although little seems to happen, each session prices seem to drop and yields climb.

"It all adds up in a week," he said about what feels like a "heavy" market.

"It's an insidious kind of weight," he said.

"Anything concerning the world is not materially getting any worse, it's just causing us to slip and slide," he said.

"I guess we're going to see more of this as we drift in towards Christmas," he said.

In Turkey, authorities have announced a ban on the pro-Kurdish Democratic Society Party (DTP) which has been accused of aiding Kurdish separatists.

The DTP holds seats in the Turkish parliament and has campaigned for autonomy in the Kurdish regions near the Iraqi border.

The Turkish sovereigns due 2030 were quoted down 0.55 to trade at 157.25 bid, 157.5 offered.

Russia's Dec. 2 parliamentary elections will not be reviewed by the international election monitor, the Organization for Security and Cooperation in Europe (OSCE).

In the past the Kremlin has shrugged off the importance of election oversight and has tried to block the efforts of the United Nations-affiliated group.

The OSCE has decided not to observe the elections because the monitoring teams have not been granted visas.

President Vladimir Putin's United Russia party is expected to win by a large margin.

The Russian benchmark bonds due 2030 were unchanged at 112.75 bid, 112.875 offered.

Asian trading almost frozen

Market conditions were no better in Asia.

"It's still generally weak; there's a nervous tone to the sector," a trader said about a market that has been "very difficult and very opaque."

Outside of sovereign cash and CDS "we're not seeing a great deal of flow," he said.

In the Philippines, the government announced Thursday that it has reached a deal with the Moro Islamic Liberation Front (MILF) to outline a Muslim homeland in the southern Mindanao region.

It emerged on Friday that the final terms of the deal will likely be agreed upon by the end of January.

The Philippines' sovereign bonds due 2030 were lower by 0.375 to trade around 131.5 bid, 132 offered.

Indonesia's government bonds were flat at 103.5 bid, 104 offered.

In Pakistan, U.S. assistant secretary of state John Negroponte was in the country to encourage moderate forces to band together to establish a stable democracy.

However, former prime minister Benazir Bhutto remains under house arrest where she has issued called for an end to the state of emergency and denounced the interim government established by president Pervez Musharraf.

The Pakistani bonds due 2017 have traded too infrequently to be accurately priced, but the bond is still considered a weak credit and likely carrying a spread of 450 bps to 475 bps.

Pre-holiday primary near dormant

Edgy investors are showing less enthusiasm for the prospect of more supply in a market with dwindling liquidity.

A number of issuers, many from the emerging Europe and Middle Eastern sectors, are hoping to find investors for their outstanding deals during the week of Nov. 19.

Friday, Singapore's Overseas-Chinese Banking Ltd. announced plans for a Singapore dollar-denominated 10-year lower tier II subordinated note offer (Aa2/A/A+).

The notes will carry five years of call protection.

The issuer is a Singapore-based retail and commercial lender.

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