Emerging markets flat to lower; Brazil, Argentina slide; local business only in primary

By Aaron Hochman-Zimmerman

New York, Dec. 13 - Emerging markets was wider to unchanged on a day in which many investors were more interested in the Mitchell report on steroid use in Major League Baseball.

"In credit, things are mostly unchanged ... very quiet," a trader said.

"Everybody is just looking at the Mitchell report," a syndicate desk official said.

The hopes of some that a window would open in the primary seemed less realistic as Christmas moved one day closer.

Still, Argentina and Venezuela are planning to issue bonds to their local markets in the amounts of $1 billion and $500 million, respectively.

High-beta Argentina was also the hardest hit on the day. The discount bonds due 2033 dropped 1.25.

For the losses created, "it's probably driven by Brazil," a buysider said, as a tax law responsible for 10% of the country's income was not renewed by the congress.

"The Bovespa fell 3% today," a syndicate official added.

From the major markets, headlines were moderately positive, but were not enough to create the motivation for a strong day in the emerging markets.

Lehman Brothers reported a drop in its fourth quarter earnings, but still bested market watchers' expectations.

Earnings fell to $886 million, a 12% reduction compared to the same period in 2006.

"Despite what continues to be a difficult operating environment, the firm's results for the quarter highlight our ability to perform across market cycles and deliver value to our shareholders," said chief executive officer Richard Fuld, in a press release.

Also, on the heels of the rate reduction by the Federal Reserve and the injection of liquidity by major central banks, Libor fell to 4.88% from 5.06%.

Aside from the Fed cut, the liquidity rushing out of money markets in order to strengthen end-of-year balance sheets may have influenced the Libor move, a market source said.

From the United States, the most encouraging number was retail sales, up 1.2% in November, double economists' expectations. However the producer price index, jumped above expectations to 3.2%.

Jobless claims in the United States fell more than expected to 333,000, down by 7,000, a market source said.

Volatility and equities were both only slightly changed on the day. The VIX index was higher by 0.09 to close the session at 22.56. The index is the standard measure of market volatility.

Emerging markets widened significantly even as Treasuries were hurt by U.S. economic data. JP Morgan's EMBI+ index widened by 13 basis points to a spread of 248 bps. The EMBI+ determines the amount of extra yield investors require to hold money in emerging markets debt.

LatAm drops as holiday pace sets in

Prices in Latin American trading were slipping while investors worked under pre-holiday conditions on Thursday.

"The market is sucking," said a syndicate desk official who specializes in Latin America.

"There really isn't anything good to say about it," he said.

In Brazil, a vote in the congress allowed the expiration of a tax which accounts for 10% of the nation's revenue, a market source said.

The real has suffered and the news may prevent Brazil's promotion to investment grade, the source added.

"That's a big deal, they're going to have to go back to the drawing board and figure out where to get the money," the syndicate official said.

The real was seen trading at 1.775 to the dollar.

Brazil's 11% bonds due 2040 were lower by 0.5 at 133.75 bid, 133.8 offered. The issues due 2037 were lower by 0.45 at 113.7 bid, 113.9 offered.

Argentina's new president Christina Fernandez de Kirchner denied accusations from U.S. prosecutors that four South Americans charged in Miami were trying to cover-up an attempt to illegally contribute $800,000 to her campaign.

Prosecutors claim that the $800,000 which was confiscated in Argentina this August had originated in Venezuela.

The Venezuelan government also denies any improper conduct.

"I guarantee you nothing is going to happen" as a result of the investigation, the syndicate official said.

Argentina's 8.28% discount bonds due 2033 suffered the most on the day.

They were quoted at 96.25 bid, 97.5 offered, lower by 1.25.

Venezuela's 9.25% sovereigns due 2027 fell by 0.45 to 99.75 bid, 100.95 offered.

Europe slides slightly on light trading

It was mostly a "dead day," a syndicate official said, but credits widened out slightly.

In Turkey, data showed that during the third quarter the nation's GDP grew by 2%, short of expectations.

A statement from the central bank suggested that recent rate cuts may have spurred inflation which limited foreign investment.

The bank has dropped the borrowing rate 50 bps to 15.75% from 16.25% and the lending rate to 20% from 20.75%.

"It's a positive development, but investors will have to watch carefully next year what happens to inflation," a buysider said about the rate cut.

"Inflation may pose a problem next year," the buysider said.

The Turkish bonds due 2030 slipped 0.25 to 157.5 bid.

Russia's trade with Iran doubled during the first three quarters, the chief of the Rosatom agency for nuclear power, Sergei Kiriyenko, told the Itar-Tass News Agency.

Trade volumes increased to $2.2 billion from $1.1 billion.

Also, the Russian ministry of economic development and trade submitted a plan to curb inflation to president Vladimir Putin's cabinet.

No details of the plan were released.

The Russian sovereigns due 2030 shed 0.35 to trade at 113.5 bid.

Asia stable as market looks to year's end

The action has cooled off in Asia; as with other sectors, trading was generally flat.

In the Philippines, the government announced that it will lessen its borrowing from foreign sources during 2008 in order to calm inflation.

The government is considering a plan to increase domestic borrowing by 70%, the Manila Times reported.

The Filipino bonds due 2030 were quoted at 134.5 bid.

Indonesia's government bonds due 2017 were seen trading at 114 bid.

A recent poll found that approximately two-thirds of the population in Pakistan does not support president Pervez Musharraf's re-election.

The poll was administered by a firm based in the United States before Musharraf resigned from the army.

Primary still in the hands of local deals

The global primary stayed asleep, but local-currency moves from Argentina and Venezuela are expected before the end of the year, a syndicate official said.

Venezuela is planning to squeeze in one more dollar-denominated issue of less than $500 million, a market source said.

Argentina is expected to offer $1 billion in discount bonds to the Argentine social security agency, Anses, a syndicate official said.

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