Emerging markets registers third positive day; Argentina outperforms; talk of primary resurgence

By Aaron Hochman-Zimmerman

New York, Nov. 29 - Emerging markets moved higher for the third day in a row, prompting thoughts of new issues around the syndicate desks.

Trading was modest but healthy, even as equities were schizophrenic and overall flat.

"On a spread basis we're much wider than August," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

However, the market has not seen new lows in pricing. "I think that's quite significant," he said.

A trader said the past few sessions have not made "a proper recovery."

"Things are still better, but people are looking for follow through and it may not be there," he said.

"The past number of months have been volatile, vicious; the best we're going to hope for is the ball bouncing up the stairs," he said.

Argentina was the farthest up the stairs on Thursday, as its discount bonds due 2033 gained 1.75.

In the primary, there are still issuers who would like to price deals, mostly on the corporate side, the trader said.

Rumors surrounding potential new issues from Brazil's Banco Cruzeiro do Sul SA and Belarus' OAO Belarusbank were building as the market moves closer to the Christmas break.

"There are some serious guys who have liquidity who are willing to pay," a syndicate official said.

Elsewhere, some positive news came from the U.S. Commerce Department which announced stronger growth in the economy between July and September than previously reported.

GDP was up by 4.9% rather than the 3.9% originally estimated.

Although strong exports were partly to credit for the higher numbers, the upward trend is not expected to sustain itself through the fourth quarter, even at the dollar's current low value.

Volatility dropped significantly by midday, but crawled back, only losing 0.14 on the session to close at 23.97, according to the VIX index. The index is the accepted measure of market volatility.

Emerging markets felt healthier, but were still wider by 5 bps with a spread of 256 bps, according to JP Morgan's EMBI+ index. The EMBI+ gauges the amount of extra yield investors will demand to buy emerging market credits.

Rumors heard throughout the primary

The primary market made no sudden moves on Thursday, but on what many considered to be the third positive day in a row for emerging markets, rumors of deals crept in from the corners.

Brazil's Banco Cruzeiro do Sul may make an attempt to price a 30-month deal at 7.75% via BCP Securities on Friday, a syndicate official said.

"I heard an extraordinary thing," he added. "Belarusbank is looking at doing a bond."

The institution had been aiming at the second quarter of 2008, he said, but now they may try "even before the end of this year."

The official has heard BNP Paribas, Credit Suisse and ABN Amro may be associated with the deal.

"There's a few potential issuers at syndicate lining up," a trader said.

"Everybody on this side of the market knows that," he added.

There is no need amongst the sovereigns to force new issues, IDEAglobal's Alvarez said, but "corporates on the other hand, is a game of timing."

"People were taken a little bit by surprise in the strength of that turnaround," the syndicate official said.

Now there may be a drive to get ahead of the January rush, he said.

Argentina leads LatAm higher

Latin America had a calm but mildly positive day in trading even as U.S. equities were mostly "directionless," said IDEAglobal's Alvarez.

Overall, "the category didn't do very much," he said.

Argentina was an exception as it rallied for the second day in a row by adding 1.75 to its 8.28% discount bonds due 2033. The issue traded at 96.25 bid, 97.5 offered.

In Venezuela, as president Hugo Chavez was on the campaign trail to build support for a referendum on Sunday which would increase his influence over the country's finances and oil industry, he commented on the disintegrating relationship between his country and neighboring Colombia.

"I will have no type of relationship with him or with the government of Colombia," Chavez said to a crowd in the town of Tachira, referring to Colombian president Alvaro Uribe.

The Venezuelan ambassador to Colombia was recalled after hostage negotiations broke down between Chavez and the Revolutionary Armed Forces of Colombia or FARC.

Chavez blamed Uribe personally for the fissure, calling him a liar and a "pawn of the empire," referring to the United States.

The quarrel "didn't hurt the Venezuelan paper too much," Alvarez said, adding that the issue has been "drifting" and investors will probably hold off until Sunday's referendum.

The Venezuelan 9.25% sovereign bonds due 2027 were quoted up by 0.25 at a bid of 97.5.

The Colombian 7.375% government bonds due 2037 gained 0.625 to trade at approximately 111.25 bid, 112.15 offered.

"Colombia has been pretty stable," Alvarez said.

Brazil is facing a possible ban on beef exports from the European Union at the beginning of next year.

Some in the E.U. are concerned about foot-and-mouth disease because they see a lack of proper cattle health records in Brazil.

"I think at the moment its just lobbying," a syndicate official said about the push from the Europe.

Brazil's highly traded 11% bonds due 2040 were lower by approximately 0.15 to 133.125 bid, 133.25 offered.

Brazil's government bonds due 2037 were up 0.75 to trade at 113.25 bid, 113.5 offered.

Emerging Europe tempers profit taking

Emerging Europe continued the on the path of profit taking which was elevated on Wednesday's stronger market.

"That seems to be the pattern," a trader said about the rash of selling, although Thursday was "quiet, but in the same vein."

The market will continue to fluctuate, he said, but the hope is that it fluctuates higher.

"There's a bout of recovery and then we'll get carried away and we'll wait for the next negative headline," he said.

In Russia, president Vladimir Putin has been campaigning for his United Russia party in Sunday's parliamentary elections.

The expected win by Putin's party is likely to carry over to the presidential elections in March.

Still, opposition leaders have led protests, including chess champion Garry Kasparov who was released from prison Thursday after being arrested during an anti-Putin rally on Nov. 24.

In many countries elections result in violent movement in the market, such as the recent elections in Argentina, but the outcome of the Russian vote is less in doubt.

"The Russian form of democracy ... I don't think anyone expects anything," the trader said about market reactions.

Market watchers in emerging Europe have become accustomed to oil-related conflict between Russia and the Ukraine, but the latest flare up between the two is over higher export prices in Turkmenistan.

Russia's state-run monopoly OAO Gazprom has agreed to pay 50% more to Turkmenistan and claims it must pass the cost on to users in the Ukraine, according to a BBC report.

Because so much of the oil sold by Russia to the E.U. passes through the Ukraine, the Ukrainian government has asserted that it should benefit from the rising cost of oil.

The price of light sweet crude spiked earlier in the day to $94.30 per barrel after a pipeline explosion near the Canadian border in the United States, but ended the day back down around $91 per barrel.

Russia's benchmark bonds due 2030 were spotted up 0.2 to trade at approximately 113.45 bid, 113.55 offered.

Turkey's sovereign issue also due 2030 was seen trading at 157.125 bid, 157.25 offered, higher by 0.375.

Asia flat amid headlines

Headlines poured out of Asia, but had little effect on bond prices as the sector held largely flat.

China announced that it will allow the yuan to be more subject to the market environment.

"They have commented on that in the past, to be perfectly honest," a syndicate official said.

In the Philippines, an attempted coup led by senior government and military officials was thwarted by approximately 1,500 federal soldiers.

Rebels occupied and fortified themselves in the luxury Peninsula Hotel in Manila where they called for the overthrow of president Gloria Macapagal Arroyo.

Two government armored personnel carriers rammed the hotel allowing special forces troops in to fire tear gas and small arms during the recapture of the rebels.

"We are going out for the safety of everybody," senator Antonio Trillanes, one of the rebel leaders told Agence-France Presse.

"We call on the military to withdraw support for Mrs. Arroyo in order to end her unconstitutional and illegal occupation of the presidency," said Brig. Gen. Danilo Lim, another of the rebel leaders.

Both Lim and Trillanes recently escaped police custody where they were standing trial over another coup attempt in 2003.

"Another month, another coup," a syndicate official said.

The Filipino benchmark bonds due 2030 only dropped 0.25 to trade around a bid of 132.25.

Indonesia's government bonds due 2017 were flat at a bid of 103.

Pakistan's president Pervez Musharraf accepted his second presidential term as a civilian and shortly after announced that the last day of the state of emergency will be Dec. 16.

Musharraf encouraged all of the opposition parties to participate in the national elections scheduled for Jan. 8, but the prime minister deposed in Musharraf's 1999 coup, Nawaz Sharif, still intends to boycott the vote.

Former prime minister Benazir Bhutto committed to her party's involvement in the vote.

The Pakistani sovereign bonds due 2016 were spotted up by 0.35 to a bid of 90.25.

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