Emerging markets firmer; primary out for Rosh Hashanah; 'real test' for market after rate cut

By Aaron Hochman-Zimmerman

New York, Sept. 13 - Emerging market bonds had an improved sentiment Thursday, although trading was light on the first day of Rosh Hashanah, the Jewish new year.

"[Emerging markets] clearly feels better along with stocks," a portfolio manager said.

"It's getting more optimistic with the Fed [rate cut expected] and subprime mess not spinning out of control," the manager added.

Investors are currently upbeat over the prospects of the Federal Reserve easing the Federal Funds lending rate.

"We are in a pre-Fed period where people have a positive event that will happen in the near future to focus on," the portfolio manager said.

The "real test" of the market will come when people have a chance to digest whatever action the Fed takes, the manager said.

Stocks, most likely also driven by the anticipated Federal Reserve Bank lending rate reduction, finished up on the session.

The Dow Jones Industrial Average finished the trading day at 13,424.88, having gained 133.23. The Nasdaq Composite Index ended at 2,601.06, gaining 8.99.

Even as stocks improved, the dollar plummeted and fell to all-time lows against the euro, ending at 1.388.

JP Morgan's bellwether EMBI+ index, which measures the yields investors accept to hold emerging markets, was nearly flat, seen off 3 bps at 234 basis points from a close of 237 bps Wednesday.

Russian intrigue

In Russia president Vladimir Putin's own choice for prime minister, Viktor Zubkov, head of Russia's Federal Financial Monitoring Service suggested his own possible run for the presidency in March 2008.

Most believe that Zubkov, as Putin's choice, is a Kremlin loyalist; but many in Russia are still guessing about his beliefs and intentions.

In spite of the political intrigue, Russian debt dynamics remain "very solid," according to a market source.

There are obvious risks due to the nature of the political situation and fallout from any drastic changes, but the risks are not enough to overshadow the "strong economic growth," the source said.

In corporates, Vimpelcom is a closely followed issuer considered to be an attractive investment, a trader said.

Another market source considers the relationship between Alfa and Telenor, the two companies which control the telecom, as its greatest liability.

Bonds issued by commercial bank VTB due 2015 are also a good value. The greatest risk comes from the potential instability in the Russian government and economy, the source said.

The Russian 8.25% sovereign due 2010 was seen trading around 103 Thursday.

Elsewhere in Europe, Poland has kept itself relatively isolated from the U.S. subprime problems, a market source said.

The zloty has shown volatility, but not so much as to discourage investment in Poland.

The zloty ended at 2.728 to the dollar Thursday.

Brazil holds rates

Brazil's central bank decided against changing rates for the first time in two years. The rates were expected to be cut to 11% from 11.25%. The government acknowledged it needs to take an active role to prevent inflation as Brazil's economy continues to grow quickly.

A market source suggested Brazil's 10-year benchmark 6% notes due 2016 are a worthwhile investment.

Growth and the accompanying inflation are inherent risks, but the benefits still outweigh the costs, the source said.

The government-controlled fuel and gas firm, Petrobras International Finance was also recommended by the source.

Although, commodity and especially oil prices have been high, the source suggested the slight possibility that oil prices could drop, and considers that as a potential downside risk to investment.

In fact, fuel prices were seen at a record high of $80 per barrel Thursday.

The real was up for the third day in a row. It finished at 1.903 on the dollar.

LatAm sovereigns up

Market watchers are conflicted about the value of taking on risk in Argentina, an investor said.

"The [economic policy] is not very orthodox," the investor said, adding: "On the other hand, the economy looks pretty strong.

"There's been a tug-o-war between the policy and the overall economy," he said.

Argentina's 8.28% sovereigns due 2033 were seen slightly stronger, trading around 87.5 on Thursday.

Elsewhere in Latin America, Venezuela's 9.25% bonds due in 2027 were spotted trading slightly up around 101.00.

Asia mildly better

Asia started the day widening out, but tightened back down as the session closed, a trader who specializes in Asia said.

"It's definitely improved a fair bit from this morning in the sovereign, cash and CDS [markets]," the trader said.

"Spreads came off the panic-induced wides," the trader added.

The improvements served to maintain a "decent run" which has carried on for last two or three sessions, the trader said.

Overall, "there hasn't been a great amount of activity, or transparency," the trader said.

In Indonesia as rescuers and response crews dealt with a fourth earthquake and further tsunami warnings, the countries 6.875% sovereigns due 2017 improved and finished at bid 102.75, 103.25 ask.

Philippines's 7.75% notes due 2031 closed at bid 108.00, ask 109.00. The 6.375% notes due 2032 ended the day at big 95.75, ask 96.63.

The Philippines' 5-year CDS ended the day around 185.00 from an opening of 176.00.

And in China, bonds issued by China Fishery "continue to improve" according to a market source. The company has had to deal with increasing capital expenditures, but has reported promising fundamentals, the source said.

'Very little' in the primary

In the primary market, the Rosh Hashanah holiday added another reason for the lack of new issues.

Volatility also continued to play a large role in keeping new issues away from the emerging markets limelight.

On a quiet day, the accepted measure of market volatility, the VIX index, managed to drop slightly. The index lost 0.20 to end at 24.76.

A trader said the primary market has been doing "very little."

There are many Asian issuers on the backlogged calendar, but only small chances they will be able to complete deals within the near term, the trader said.

Unsympathetic to the new issue pipeline are worries about spillover from a damaged U.S. economy.

"Eventually if the U.S. economy does really slow down then it will have some effect," the trader added.

Asian companies and government have been working to protect themselves by reducing their exposure to the United States.

"There has been a fair amount of movement from reliance on exports to developing domestic demand," the trader said.

The trader added that scandals surrounding tainted products produced in China may also take a toll on the Chinese economy as the Christmas buying season approaches.

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