Emerging markets gain with U.S. stocks; Philippines, Indonesia gain; Gazprom waits for next week

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 2 - In the primary market the crickets can still be heard over the mass confusion as even powerhouse OAO Gazprom pushed off its benchmark until Monday at the earliest.

In trading, participants continued to look to U.S. financial markets for their inspiration. Seeing the bellwether Dow Jones Industrial Average up more than 100 points on the day as companies came in with better earnings helped to put on the back burner earlier jitters about the contagion from the U.S. subprime mortgage lending industry's problems and encouraged investors in riskier asset classes, including equities, high yield bonds and emerging paper.

But the appeal of stocks and other such seemingly riskier vehicles did not diminish the attraction of U.S. Treasuries - a departure from the general pattern which sees them moving inversely to stocks and other asset classes. The yield on the benchmark 10-year notes fell by 2 basis points to 4.77%.

The JP Morgan EMBI+ index showed the key gauge of investor risk tolerance or aversion, the average spread of EM debt versus Treasuries, tighten by 7 bps to 214 bps.

Asian bellwethers Philippines and Indonesia appeared better, particularly as reflected in the lower price of credit default swaps contracts used by investors to hedge against the possibility of a default.

Turkey's bonds were also better, while the Latin American rebound was led by Ecuador and Brazil.

One market source is taking comfort in the fact that "the reasons behind the current crunch are mostly concentrated in the U.S. credit market and do not reflect the current fundamentals in emerging markets," the source said.

The source's view of emerging markets is still "favorable," but he said he was wary of excess risk emanating from "the current rise in volatility."

However, the source did acknowledge the possibility that there may be a tangible effect on emerging markets if investors sell emerging market holdings in order to cover losses in other areas.

An emerging markets syndicate desk official admitted to the possibility of a sell off to cover losses, but did not feel it was a serious threat to the sector.

An emerging markets analyst considers oil-linked names to be the best bet if today's conditions persist.

"I really think we're going to get another few days of relatively bullish sentiment out there," the analyst said.

"If that's the case, I think some of the oil names offer some great value. Venezuela is the obvious candidate, with spreads still trading around 350 [bps] in five-year CDS, but Indonesia is another great buy at these levels," the analyst said.

"And Russia at 75 basis points is a screaming buy if you think the broader market can continue to stabilize in the days ahead," the analyst added.

On the other hand, the analyst cautioned that some names still do not offer enough compensation for their potential risks.

"I think you stay away from Turkey and South Africa, [there is] just not enough yield relative to their peers; and they are clearly exposed to a more serious tightening of global liquidity, the analyst said.

"I don't see things getting a lot easier," a syndicate desk official said.

"It's very hard to be positive right now," the official added.

In Asia, "The worst performing segments of the Credit Suisse Asian bond index in this sell off since May 31 are technology and real estate," said a market source.

Among "the best performing are conglomerates and utilities," the source added.

Relative to Latin American and U.S. BB rated corporates, dollar-dominated Asian bonds have done well, but have underperformed U.S. BBB rated issues, the source said.

Another market source noted that Asian markets were "overall weaker overnight then I would have thought given strong equity close," the source said.

Many traders are basing decisions more on emotion that economic principles, according to a market source.

"The market trades again without regard to the economics," the source said.

"The only issue that is carrying weight at this point is the amount of fear and risk aversion in the market on a given day," the source added.

Asian market follows Wall Street's lead

A New York-based trader in Asian debt said that "it's been pretty much the same story for the last week - the markets finish 5 to 10 [bps] tighter across the board in Asia, but everyone right now is still incredibly jittery, and it seems investors and investment banks alike are spending the days staring at where the S&P [500] is trading, and our markets are kind of following in line.

He saw that same 5 to 10 bps spread tightening Thursday across the Asian benchmark names.

"We saw a decent amount of flow today, good two-way action back and forth, as equities remain incredibly volatile."

The trader added that "we have quite a number of fast-money accounts coming in, looking to add to shorts or more or less try to play the trend. We saw lots of buyers and sellers - but at the margin, the market remains incredibly jittery and there seems to be quite a number of very nervous investors out there.

Indonesia, Philippines better

With Indonesia's bonds having firmed on Wednesday after Moody's Investors Service said that it would review Jakarta's B1 sovereign debt rating for a possible upgrade, the trader said that "at the margins, maybe [Indonesian sovereigns] outperformed the Philippines by 1 bp, but the two credits are looked upon as fairly similar, in terms of spread in cash [bonds] and CDS, and until the market comes out of the turmoil which it's going through right now, I don't think there will be a lot of people looking to put on relative-value trading between the two credits."

He meantime said that "when things calm down, you might see Indonesia improve vis a vis the Philippines by a few more basis points, but right now, I don't see that happening."

A market source saw the cost of a five-year CDS contract on Philippine debt -which had been quoted in the 215/225 bps area on Wednesday - as having come down to about the 198 bps level in Thursday's dealings, while Indonesia, whose cash bonds and CDS levels move more or less in tandem with the Philippines, was at 198/205 bps - both well in from the levels out at 250 bps at which they had been quoted at the height of the market retreat last week.

Philippine dollar-denominated cash bonds were meantime seen as fairly steady, with the benchmark 2031 bonds quoted at 105.75 bid, 106.25 offered, and the country's 2032 bonds at 93.5 bid, 94 offered.

Another source indicated that Philippine peso-denominated bonds were better, helped by speculation that Manila will wind down its sales of new debt after having already sold 10 times more bonds than originally planned to meet market demand. That talk of reduced sales was spurred by the revelation by the Finance Ministry that July's deficit was smaller than the government had expected.

The 14 3/8% notes due 2017 were seen having risen nearly ½ point on the session to just under 147.75. It was the fourth consecutive upside session for those bonds

Hutchison, Indian banks up

In the Far Eastern corporate sphere, the first trader also said that Hong Kong-based conglomerate Hutchison Whampoa's 2033 bonds, which act as a benchmark among the Asian high-grade names, "was decently bid today. We saw clients coming in and buying it in the morning." He pointed out that the market tone "was not as great in the afternoon, despite stocks' rally, which was kind of bizarre."

Nonetheless, he said the '33s were about 5 bps tighter on the day "and we did see some buying interest for the first time in a while in some of the Indian bank names, which had widened out pretty significantly in the last three or four weeks."

Turkish debt gains with lira

Elsewhere in Asia, Turkish bonds were seen better, in line with a gain in that country's currency, the lira.

They were responding to speculation in the Turkish press that the ruling AK Party may decide not to press ahead with the presidential candidacy of foreign minister Abdullah Gul, a devout Muslim whose attempt to win the presidency have sparked tension between the Islamist-oriented party and the country's military and other secular forces who do not want to see Turkey's society become more sectarian.

Ecuador sets Latin pace

In Latin America, Ecuador's debt led the way, along with Brazil.

The former's 10% bonds due 2030 was seen rising 1½ points to 85.5, while the latter's benchmark 11% bonds due 2040, considered the most liquid and widely traded EM issue, was up about ½ point to 130.35.

Meanwhile, the cost of CDS protection for Brazilian debt continued to come in, this time by about 5 bps to 109.5 bps, as investors became more comfortable with the risks of holding Latin debt.

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