Emerging markets trading flat; investors reluctant to take on risk; spreads wider as Treasuries gain

By Aaron Hochman-Zimmerman

New York, Jan. 2 - Emerging markets were still feeling the effects of late-night New Year's parties as light trading volumes left credits flat.

A general reluctance to take on risk so soon after the holidays was encouraged by poor manufacturing numbers from both the United States and United Kingdom as well as a spike in oil prices.

High demand around the world, along with recent political instability and a weak dollar finally drove prices of light sweet crude to the high side of the $100 per barrel mark.

Prices fell back in the afternoon as oil was seen trading at $99.32 per barrel by the end of the day.

Still, "none of the oil exporters are reacting," said a buyside source.

Commodity prices and a lackluster 2008 forecast from the Federal Open Market Committee minutes dragged on equities, prompting many bond investors to leave their cards on the table.

Spreads widened but the movement was attributed to emerging markets "reflecting the rally in Treasuries," the buysider said.

Overall, "it's still quiet," the buysider said, hanging the lack of action on caution on the part of investors returning to the market after the break.

Volatility went into a gentle climb in the morning and ended the day higher by 0.67 at 23.17, according to the VIX index. The index is the commonly accepted gauge of market volatility.

As a sector, emerging markets widened by 10 basis points with the help of the Treasury rally to a spread of 249 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to keep money in emerging markets debt.

LatAm unmoved by 'strong bolivar'

In Latin American trading, spreads widened on the back of gains in Treasuries, but prices held still.

Venezuela began the new year by unveiling a new inflation fighting currency, the strong bolivar.

The strong bolivar eliminates three zeroes from the former bolivar.

Unlike the name, few expect any new strength for the Venezuelan currency.

"That's just a technical," a buysider said. "They're just taking some zeroes off."

$1 now buys 2.14 Venezuela bolivares fuertes.

Venezuela's 9.25% bonds due 2027 were quoted at 100 bid, 102 offered.

Argentina's government has been working to fatten its bank account. It recently upped a tax on cars, engines, boats and planes exceeding 140,000 pesos to 18% from 10%, the buyside source said.

The government also did not renew a tax exemption on new investments, the source said.

The Argentine 8.28% discount bonds due 2033 were mostly flat at 95.85 bid, 96.3 offered in trading Wednesday.

Brazil has yet to release its latest consumer price index figures, but has only offered the news that "there's going to be further delays," the buysider said.

The country also intends to cut spending and raise new taxes to replace approximately 40 million reals in revenue it will lose without the recently expired CPMF tax on financial transactions.

The Brazilian 11% bonds due 2040 were spotted at 134.1 bid, 134.25 offered. The bonds due 2037 were quoted at 114.9 bid.

Asia returns quietly from New Year's

"Activity is still fairly light," a trader said about activity at the New York and Asian desks.

A combination of oil prices and manufacturing reports from the United States and the United Kingdom made a sour day across the market.

Credits are "pretty well guided by what happens in the equity market," he said.

"Prices haven't really moved that much, but there's definitely been a real nudging to the left," he said.

Screens were "virtually blank in high grade," he said.

"Flow-wise it's been quite light," even as some investors were trying to take advantage of sovereign cash in Indonesia and the Philippines, he added.

Indonesia's state-owned power provider PT Perusahaan Listrik Negara announced plans to invest $1.5 billion in a $6 billion project to provide every Indonesian with power by 2020.

The rest of the financing will come from others in both the public and private sectors.

The plan includes the construction of 26,000 kilometers of cable and new facilities in Sumatra and Java, the Jakarta Post reported.

The Indonesian five-year CDS was seen at 163 bps bid, 165 bps offered, which was 4 bps wider on the offer side.

The Indonesian government bonds due 2017 were close to unchanged. The bonds traded at approximately 103.25 bid, 104 offered.

In the Philippines, the peso set a new high against the dollar as corporate interest in the U.S. currency continued to wane in the new year.

The peso was seen trading at 41.16 to the dollar.

The Philippine sovereigns due 2030 were flat at 135.5 bid, 136 offered.

Pakistan's bonds have looked "pretty grim" in recent days, the trader said.

"It hasn't traded after the assassination when prices just got marked straight down," he said.

Aside from some investors who tried to take advantage of the falling prices, the bonds were "badly beaten up last week ... since then, nothing," he said.

President Pervez Musharraf announced that he will use military force, if necessary, to preserve order in the weeks leading up to the postponed parliamentary elections now scheduled for Feb. 18.

Also, Pakistanis investigating the assassination of former prime minister Benazir Bhutto will accept the help of a team of Scotland Yard detectives offered by British prime minister Gordon Brown.

The Pakistani bonds due 2017 were unchanged at 80 bid, 85 offered.

Emerging Europe 'still on holiday'

In emerging Europe, volumes were low and trading went on without any particular factor driving the market, a trader said.

"People are still on holiday," he said about a sluggish beginning to the new year.

Serbia and Russia are making preparations to allow OAO Gazprom to acquire 51% of the Serbian national oil company Naftna Industrija Srbije for €500 million. An addition €500 million will be invested in Naftna Industrija annually until 2012.

The Russian sovereign bonds due 2030 were seen trading at 114.5 bid.

Also in emerging Europe, Cyprus and Malta converted their currencies to the euro on Tuesday. The two join 13 other nations with votes in the European Central Bank.

In Turkey, the public was surprised to hear the announcement of utility and transportation rate hikes in 2008, reported the Turkish Daily News.

The price of natural gas will increase 7.4% for personal consumption and 6.4% for industrial use. Electricity prices will be raised 15% for personal use and 10% for Turkey's industrial users.

The Turkish sovereigns due 2030 were quoted at 157.75 bid.

In Africa, "Kenya was downgraded on the back of political, social unrest," a buysider said.

Standard & Poor's lowered the long-term local-currency rating to B+ from BB- as the supporters of presidential candidate Raila Odinga and president Mwai Kibaki fought in the streets over accusations of corruption and voter fraud.

"That's pretty much the only news I see," the buysider said about the entire market.

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