Emerging markets fall with equities; jobs data keeps volumes thin; primary clears cobwebs

By Aaron Hochman-Zimmerman

New York, Jan. 4 - Light volumes in emerging markets kept prices from sinking lower than they otherwise might have in response to disappointing employment numbers from the United States.

The day's retreat among benchmark bonds was led by the Philippines, which saw a drop of 1.25 from its sovereigns due 2030.

One of the bright spots in the market was a revived primary which saw a benchmark-sized sovereign announced by Indonesia along with a possible $400 million from Brazil's Usinas Siderurgicas de Minas Gerais SA.

Despite the news from the primary side, credits suffered with equities as both were dragged under by the disappointing non-farm employment figures from the U.S. Bureau of Labor Statistics.

Unemployment rose to 5% in December as employers added only 18,000 jobs, according to the Department of Labor. Most of the losses came at the expense of the construction and manufacturing sectors.

With equities falling, market volatility found room to grow. The VIX index added 1.45 to close at 23.94. The index is a commonly used measure of market volatility.

As a sector, emerging markets widened only slightly as Treasuries gave up some of their early gains. JP Morgan's EMBI+ index widened by 2 basis points to a spread of 252 bps. The EMBI+ calculates the amount of extra yield investors will demand to hold money in emerging markets debt.

Emerging Europe falls on U.S. non-farms

"Absolutely," a portfolio manager said when asked if the employment report from the U.S. Department of Labor pulled the rug from under the market.

"There's still a lot of people out," he added, but "there's no end to it in the near future" he said about the difficult times in the market.

In the Ukraine, there is concern over the investigation into the financial situation of the nationally owned oil producer NAK Naftogaz Ukrayny by a special committee of parliament, but prime minister Yulia Timoshenko promised the government will support the company financially.

"They're going to back the outstanding issues," the portfolio manager said, which should mitigate the risk for many people.

"The bond is keeping up quite nicely at the 96-ish level," he said about the bid price which recently showed a low of 88 bid.

Still, "we're trying to move people out of that one," he said, in favor of the Ukraine's largest bank, Privatbank.

Privatbank's issue due 2012 was seen trading near 92 bid.

The Ukrainian sovereigns due 2016 were up 0.2 to trade at 99.2 bid, 99.6 offered.

Turkey is expecting a rise in mergers and foreign investment in 2008, according to a report in the Turkish Daily News.

Foreigners are also expected to shift their attention from the banking sector towards consumer goods such as food, automobiles, marketing and advertising.

Turkey's government bonds due 2030 held flat at 157.3 bid, 157.6 offered.

In Russia, OAO Gazprom expressed its objections to measures proposed by the European Union to limit single ownership of oil producing and supplying interests.

Chairman Alexander Medvedev claimed separating entities would endanger supply security and interfere with investments already in place, according to the Itar-Tass News Agency.

The Russian sovereign bonds due 2030 were seen higher by 0.7 to trade at approximately 115 bid, 115.25 offered.

Primary revving up

The primary began to show the first signs of life in the new year, although many are still skeptical about next week's prospects.

"There is positive outlook by these rumors," a portfolio manager said, but most market watchers were cautious about allowing their optimism to be anything but guarded.

The sovereign issuers are expected to be "the only real strength in the market," a syndicate official said.

Indonesia has mandated Barclays, HSBC and Lehman Brothers to bring a benchmark-sized sovereign (Ba3/BB-/BB-).

A roadshow will be held from Tuesday through Friday.

The deal from Indonesia has been long expected. A $2 billion deal with 10- and 30-year tranches was announced in November with a target date of early 2008.

In corporates, Usinas Siderurgicas de Minas Gerais SA (Usiminas) announced plans to offer a $400 million 10-year bullet bond (/BBB-/BBB-).

JP Morgan and UBS will act as bookrunners for the deal.

A roadshow will be held during the week of Jan. 7.

Usiminas is a Belo Horizonte, Brazil-based steel producer.

"It's for between $300 [million] and $400 [million], so it may be lowered to $300 [million] if the market is bad," an emerging markets strategist said.

The deal is expected to price "in the 7% neighborhood," a market source said.

Rumors were also swirling about a $300 million bond "sometime this month" from Colombia's Empresa de Telecom de Bogota, the strategist said.

High-betas slip in slow LatAm

In Latin America, with many investors still on vacation, high beta prices were knocked down by the non-farm employment headlines.

Still, with so many desks empty and liquidity sidelined, it was difficult to gauge the market's true reaction, a syndicate desk official said.

Venezuela's president Hugo Chavez announced his intent to replace 13 members of his cabinet.

Among the fired cabinet officers is vice president Jorge Rodriguez who was blamed by many in Chavez's camp for the referendum loss on Dec. 2.

The likely replacement for Rodriguez is the current housing minister Ramon Carrizales.

The sacked cabinet officers also included the minister of finance Rodrigo Cabezas, according to a syndicate desk official.

Many expect the new cabinet to help Chavez reintroduce his failed reforms.

"He's desperate right now, that's my opinion," the official said about Chavez.

As for the country's bonds, he said: "They're wide, but they're not wider than anybody else."

"Argentina is 17 [bps] wider, Venezuela is 19 [bps] wider," he said.

"Should it be more? I don't know," he said, adding: "Everything is mitigated by the price of oil."

The Venezuelan 9.25% bonds due 2027 fell 0.75 to a bid of 100.6.

Argentina's 8.28% discount bonds due 2033 led the losers with a drop of 1 point to a bid of 94.5.

Brazil's sovereign bonds gained ground as the 11% bonds due 2040 added 0.3 to a trade at a bid of 134.5. The bonds due 2037 tacked on 0.25 to trade at a bid of 114.25.

Asia quiet with weak tone

"It's very thin and very weak," a trader said.

"The only things that are really trading is sovereign cash and CDS ... and everything is lower," he said.

"There's a pretty weak tone to the market," and "flows have not been very large," he said.

The slight selling has been focused on dumping risk, he said.

In Indonesia, the government made changes to its list of industries which allow and do not allow private investment, according to the Jakarta Post.

Small- and medium-sized businesses continue to retain protected status, but sectors relating to installation and maintenance of roads and the non-ferrous metals or lead industries will now allow private involvement.

The government also announced it will up its assistance to the country's textile industry to Rp. 400 billion in 2008. It offered Rp. 255 billion to textile producers in 2007.

Indonesia's government bonds due 2017 were seen lower by 0.25 at 102.75 bid, 103.5 offered.

In the Philippines, the peso continued its climb over the frail dollar on strong remittance inflows.

The peso was seen trading at 40.8 to the dollar.

The Filipino government bonds due 2030 lost 1.25 to trade at approximately 133.5 bid, 134 offered.

Scotland Yard detectives arrived in Pakistan Friday to aid in the investigation of the assassination of former prime minister Benazir Bhutto.

President Pervez Musharraf accepted the help from the United Kingdom as he said he is "not fully satisfied" with the conflicting theories offered by the various agencies looking into her death.

Bhutto's Pakistani People's Party (PPP) has requested an investigation team from the United Nations.

The Pakistani bonds due 2017 sank by approximately 3 points to 77 bid, 81 offered.

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