Emerging markets quietly waits for Fed; Argentina up on inauguration; rupee deal priced in primary

By Aaron Hochman-Zimmerman

New York, Dec. 10 - Most of emerging markets was marking time before the Federal Reserve Board meeting Tuesday, but hope for a sustained rally was moving forward.

The high-betas saw some gains, especially Argentina, which celebrated the inauguration of new president Cristina Kirchner by tacking on 1.75 to its discount bonds due 2033.

The primary was again in the hands of the local-currency issuers.

The Union Bank of India priced Rs. 6 billion in two tranches.

Most investors kept their chips close by ahead of the Fed meeting.

"If it doesn't get resolved in the coming weeks," a trader said about the banking and confidence crisis, "we go back to the dim dark days in the new year.

"We just need some stability," he said in order to "iron out those highs and lows and just consolidate."

Emerging market investors were collectively in a good enough spirits to shrug off worries pouring in from the banking sector.

Societe Generale announced it would bail out an investment vehicle to the tune of $4.3 billion while UBS added another $10 billion in write-downs due to its U.S. subprime exposure.

With each step in the wrong direction a trader wondered if the market was close to the bottom.

"There can't be anything left can there?" he asked, figuring this bout of write-downs has to be "close to the last one.

"But I think it's too early to say that's the end," he said.

"Hopefully the fever has broken and the patient is out of intensive care and we can feed it some chicken soup," he said about the market.

More recently "the economic news has been excellent, and for EM that's especially important," an emerging markets analyst said.

"I think this rally can have legs, even if the Fed disappoints," he said.

A trader disagreed, saying that the Fed must support the rally with a rate cut.

Elsewhere, improving equities and sentiment pushed volatility slightly lower by 0.11 to 20.74, according to the VIX index. The index is the standard measure of market volatility.

Emerging markets investors were hesitant to make any sudden moves ahead of the Fed meeting. The sector tightened by 1 basis point to a spread of 233 bps, according to JP Morgan's EMBI+ index. The EMBI+ evaluates the amount of extra yield investors will demand to hold emerging markets debt.

LatAm sees light volume

The high-betas in Latin America picked up slight gains as the more stable credits held flat on the day before the Fed meeting.

With a low volume day on Monday, most likely "it will be quiet to the latter part of the day," on Tuesday, a syndicate official said.

Venezuela's president Hugo Chavez has momentarily turned his attention away from the referendum loss to enact other reforms in his country.

"I don't care if they call me crazy," said Chavez.

On Sunday, Venezuela conceived its own time zone. The new time is 30 minutes earlier than the original time (four hours, 30 minutes behind GMT) and is designed to increase worker productivity by adding more daylight.

Also over the weekend, Chavez met with Belarus' president Alexander Lukashenko.

The two agreed on a deal that will supply Belarus with oil for years in exchange for modern weaponry, including the possible sale of air defense systems for Chavez's military.

Both leaders voiced their objections to being labeled dictators by much of the world.

Venezuela's high-beta 9.25% bonds due 2027 added 0.25 to trade at approximately 101.25 bid, 102 offered.

Argentina inaugurated its first female president, Cristina Kirchner, on Monday. The former first lady entered office with a sizable mandate from the electorate, but many questions remain over how much she will stray from her husband's policies.

The 8.28% discount bonds due 2033 were up 1.75 to trade at 99.75 bid, 100.2 offered.

Unlike the high-betas, Brazil stayed mostly unchanged during Monday's low volume session.

The highly watched 11% bonds due 2040 were quoted flat at 134.375 bid, 134.5 offered.

Also, seven countries across South America have joined to create a new international bank called Banco del Sur to replace what are considered the failed policies of the International Monetary Fund and the World Bank.

The members of the bank are Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay and Venezuela.

The bank's headquarters will be in Caracas, Venezuela with offices in Buenos Aires, Argentina and La Paz, Bolivia.

Emerging Europe up on macro strength

Trading in emerging Europe carried on in the recent vein of recovery despite Friday's stumble.

"It does seem that the better tone of the last week seems to be getting a bit more traction," a trader said.

If the rally is built to last, the core financial problems will have to show signs of improvement, he said.

"I don't think we can sustain a rally in the froth," he said about issues not directly connected to major banks and lenders.

The high volumes that often accompany a rally may surface despite the usual Christmas lull, the trader said, but "I don't think we need higher volumes to consummate the better feelings."

What is needed is "a bit more greed rather then fear," he said.

In Russia, president Vladimir Putin has given his support to first deputy prime minister Dmitry Medvedev to become the next president of Russia in March.

Medvedev is the former chairman of OAO Gazprom and has served Putin's government as an administrator of various social programs.

Also, deputy prime minister Alexei Kudrin announced nonresident investments in Russia totaled $45 billion in 2007 compared to $26 billion in 2006 and $13 billion in 2005.

The Russian sovereign bonds due 2030 were slightly lower by 0.125 to trade at 113.625 bid, 113.75 offered.

Turkey's benchmark bonds due 2030 were also lower by 0.125 at 157.875 bid, 158 offered.

Meanwhile, European Union officials met with African leaders to sign a declaration to advance free trade, in Lisbon on Sunday.

The European Union hailed the talks as a positive step toward improved trade, according to a BBC report, but many African heads of state were less enthusiastic.

President Abdoulaye Wade of Senegal said his country would not accept another Economic Partnership Agreement (EPA). The current agreement will expire at the end of the year.

Wade accused the Europeans of at grasping at trading rights because they are losing influence to China.

Asia biding time, taking profits

Asian trading saw "very little activity" other than "a little profit taking," a trader said.

"Everyone is waiting for 2 o'clock [Tuesday]," he said. The FOMC will make its announcement at 2:15 p.m. ET that day.

In the Philippines, foreign direct investments were up substantially in the first three quarters of the year.

Foreign investments increased by 22% or $1.9 billion during those nine months compared to $1.6 billion during the same period of 2006, the Manila Times reported.

The Philippines' government bonds due 2030 slipped 0.25 to 134.25 bid.

Indonesia's bonds due 2017 were up by 0.125 to 103.625 bid.

In Pakistan, former prime minister and opposition leader Nawaz Sharif's party will contest the Jan. 8 election results.

Due to the existing state of emergency, Sharif and opposition rival Benazir Bhutto feel the election results will be tainted.

President Pervez Musharraf has stated his intentions to restore the constitution and end the state of emergency on Saturday.

The Pakistani government bonds due 2017 were very lightly traded at flat at 89.5 bid.

Primary quiet, but may hinge on Fed

Some investors had pinned some hopes on the idea that the market's upturn would open a window, if not a door, for new issues.

Some have filed the primary on the back shelf until next year, but for others the lack of action came as a surprise.

"People may be waiting around for tomorrow," a syndicate official said about the Fed meeting.

Local deals continued to prove their ability to move through a pipeline which is still damaged by the lending crisis.

Union Bank of India priced Rs. 2 billion perpetual tier I bonds (AA+/LAA, local rating) and Rs. 4 billion lower tier II bonds (AA+/AA+, local rating/Fitch).

The perpetual bonds priced with a coupon of 9.9% and step up 50 bps if not called at the end of the tenth year.

The 10-year lower tier II bonds priced with a coupon of 9.35%.

The Union Bank of India is a Mumbai-based commercial and retail lender.

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