Latin America stagnates; EM waits on rate cut; ADB to price $1 billion Tuesday

By Aaron Hochman-Zimmerman

New York, Sept. 10 - Emerging markets showed little movement Monday as investors waited for the Federal Reserve Bank's impending rate cut decision.

Volatility also continued to play havoc with investors during the session. The VIX index almost touched 29.00 around midday, but closed at 27.38, a gain of 1.15.

When questioned about where safe bets existed in emerging markets, a syndicate official asked: "Are there any?"

"EM is still very tough away from the sovereign credits," another syndicate source said.

The syndicate official is anticipating the release of Lehman Brothers' earnings this Friday.

"That could be interesting as the first financial to report numbers," the official said.

In trading, JP Morgan's closely followed EMBI+ index widened out 4 bps to close at 241 basis points from Friday's close of 237 bps.

The Dow Jones Industrial Average showed signs of improvement as it ended at 13,127.85, 14.47 points up from its opening. The Nasdaq Composite Index was off slightly at 2,559.11 down 6.59 points from its opening.

Latin American trading in doldrums

Latin America suffered through a difficult day to see many issues remaining unchanged in trading.

Mexico's 7.25% peso-denominated bond due 2016 held steady to finish around 7.86% as Mexico's central bank contended with high wheat and bread prices and a slowing economy, according to an emerging markets strategist.

Political turmoil also injected itself into economic affairs as two opposition parties, the PRI and PRD, attempted to compel president Felipe Calderon to approve election reforms.

The changes are mostly political, but they take on economic importance based on accusations that president Calderon, a fiscal conservative, won the election by less than honorable means.

The proposed reforms would limit the amount of time political parties may campaign for office, reduce the amounts of money candidates may spend and allow for stricter audits of election accounts.

Elsewhere Argentina's 8.28% notes due in 2033 were seen on a lethargic day of trading unchanged around 85.25.

Brazil, which took the day off Friday for its Independence Day, was expected to return to provide leadership to Latin American trading. But even with Brazil playing, emerging markets hardly picked a direction to follow.

"There is not much going on unfortunately," a syndicate source said.

The benchmark Brazilian 11% notes due 2040 were seen trading at 132.60 bid, 132.75 offered. The closely watched bonds were up slightly from their close at 132.125 last Thursday.

Asia slightly off

India's 10-year benchmark 7.49% notes due in 2017 continued to drop as it weakened 3 bps, finishing at 7.86% by the market's close.

Like elsewhere, high commodity prices have hurt previous gains made in bond prices and fanned flames of inflation talk.

Overall, a market source said poor equity performance is spilling over to the credit markets and minimizing trade volume.

As a further problem, China, with the world's second largest GDP, is in a struggle to deal with its inflation problems.

The yuan jumped 0.24% to 7.52 to the dollar as the Central Bank of China allowed its currency to increase in value.

Despite creeping liquidity concerns, an analyst said he still holds "a long-term bullish view on the China property sector."

Increases in development and standard of living will bolster demand for housing and drive up prices in the near term, the analyst said.

The trend will likely continue for at least a year, the analyst added.

Difficulties which have so far run from August into September, now look like they may set the stage for market sentiment well into 2008, the source said.

In other trading activity, the Philippines' bonds were seen holding or "marginally lower," according to a trader.

"Even less activity," for Indonesia's sovereigns, the trader said.

"Not that much changed; the CDS nudged out a little bit wider when equities sold off," the trader added.

Little change in South Africa

South Africa's government bonds held on with the others around the world that also remained planted.

The key R153 bond finished at 9.34%, slightly better than its last close at 9.35% while the long-term R157 notes held steady at 8.68%.

The rand appreciated to 7.20 to the dollar from 7.24.

Like many places around the world, South Africa's economy is also feeling the effects of higher oil and other commodity prices.

Primary sees new deal, rate cut talk

The primary market calendar managed to move on the news of a $1 billion three-year issue from Philippines' Asian Development Bank.

But many believe rates will have to be cut further before the new deal pipeline can reopen and opinions are lining up behind the idea that the Federal Reserve Bank will cut interest rates. A large group of investors feel the cut will be 50 basis points.

"I think rate cuts are likely," said an emerging markets syndicate official who specializes in emerging Europe.

The data suggests the need for a 50 bps cut, but this week's economic releases will probably work against that, even as market watchers are still trying to evaluate the impact of Friday's job loss data, an emerging markets strategist said.

One market source even suggested a 100 bps cut is in order to avoid a recession.

"There's no way [the Fed] will cut more than 50 bps, more likely 25 bps, I think," said a syndicate desk official.

An investor said that market confidence was the true catalyst for the credit crunch, which may not be cured by a cut in interest rates.

Another market source suggested a Fed rate cut now would be arriving too late to help.

ADB plans $1 billion bond

The Asian Development Bank announced plans to issue a $1 billion three-year global bond (Aaa/AAA/AAA).

Initial guidance for the sale was set in the three-year mid-swaps minus 21 basis points area.

The books will open in Asia Tuesday morning and pricing is expected the same day.

Citigroup, Nomura Bank and UBS have the books.

ADB is a Manila, Philippines-based development financier.

Low liquidity may force new issues

With a pipeline that has carried no more than a trickle of new issues for the last few months, many potential issuers may begin to face a critical lack of funding, according to a strategist.

If too much pressure is put onto the loan market, it "will face a crunch of its own," the strategist said.

That crunch may force issuers hand to widen out spreads even further to raise money. The strategist is not yet pessimistic enough to believe that is the most likely outcome, but the strategist calls it "a potential risk facing EM."

Approximately $56 billion in loans will amortize in the first quarter of next year, largely in Asia and the Commonwealth of Independent States, the strategist said.

If these companies cannot find a way to raise funds they will suffer if "the debt capital market remains closed to them due to ratings, investor redemptions or market liquidity conditions," the strategist said.

In another development that will put pressure on the credit markets, European borrowers are facing up to $140 billion in commercial paper coming due this week and next, according to a market source.

About $60 billion is owed through conduits, and $80 million is unsecured, the source said.

"Inevitably," the debt coming due will lead to a widening of spreads, particularly in the high yield sector, the source added.

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