Emerging markets bounce late; primary digests new issues; recession fears damp market

By Aaron Hochman-Zimmerman

New York, Jan. 9 - Emerging markets rebounded from early losses as it tracked equities during Wednesday's session.

Since the new year emerging market credits have stayed relatively clear of the problems plaguing equities.

"Equities are down quite a bit year to date and we haven't really mirrored that," a buyside source said.

However, Goldman Sachs and others have reinforced Merrill Lynch's talk of recession.

"I think there is going to be more volatility," the buysider said.

Of the bulls and bears, "I'm probably more in the catching up to equities camp," the buysider said.

"I think the recession concerns are definitely trumping the good news about EM issuance," an emerging markets analyst said.

"On balance, I think the new issuance was almost definitely a positive for the market," he said.

"It shows the pent up demand for EM exposure, and the pent up supply of cash in general," he said.

In trading, the day's rally came "particularly in the higher-beta names," the buysider said.

Even as oil dipped back to $95.6 per barrel, Venezuela led the winners as its 9.25% bonds due 2027 posted gains of 0.75.

Volatility, which built slowly throughout the day, dove back down with the equity recovery. The VIX index lost 1.31 to close at 24.12. The index is a yardstick of market volatility.

As a sector, emerging markets widened by 2 basis points to a spread of 255 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors demand to keep money in emerging markets debt.

Late rally lifts LatAm

"It was really really quite ugly for most of the day," a trader said.

Latin American trading suffered through the day's equity swings which were still capped by the clouds of recession and punctuated by a rumor of an emergency rate cut by the Federal Reserve, a trader said.

"We closed a little better than where we opened," the trader said, but in the long-term, the recession still looms.

"I'm still not positive," he said.

During her early days in office, Argentina's president Cristina Kirchner has spent less time in public than her husband, former president Nestor Kirchner, a market source said.

He has made public appearances to deliver the government's position on the legal trouble it has with the United States over illegal campaign contributions from Venezuela and he has made attempts to free the hostages held by Colombian guerillas.

The cabinet has been noted in its relative silence as well, the source said.

Meanwhile, opposition leader and mayor of Buenos Aires, Mauricio Macri has made news with his budget balancing reforms, the source said.

Because it has been out of the limelight, the administration will likely make an announcement soon, the source said.

The government's next move may be to cap fuel price increases and limit exports, the source said.

The law known as the Supplying Law has not been enacted since the end of the Juan Peron government, the source said.

"I don't think it helps when they put caps on gas prices," a trader said.

Argentina's 8.28% discount bonds due 2033 were quoted flat at 95.6 bid.

Venezuela's tax revenues of $30 billion bested its goals for 2007 by 8.3%, a market source said.

Still, the goals were not very ambitious as the real growth was only 3.7% ahead of 2006, compared to the overall GDP growth of 8.4%, the source added.

The 9.25% Venezuelan bonds due 2027 were up 0.75 trading at 104.25 bid, 104.6 offered.

"Argentina and Venezuela are such big momentum plays," the trader said.

In Colombia, a government statement said proceeds from the retap of its bonds due 2017 and 2037 will be used to pay off external debt and will not lead to a greater inflow of dollars, a market source said.

In trading, Colombia's five-year CDS widened as far as 15 bps, but managed to creep back during the afternoon recover, a trader said.

The Colombian bonds due 2017 fell slightly by 0.15 to 109.35 bid, 109.75 offered at the end of the session.

Colombia's bonds due 2037 added 0.15 to trade at 110.15 bid, 110.35 offered.

Mexico's recent $1.5 billion 6.05% issue, which priced yesterday at 99.93, offered an anticlimactic performance.

The bonds due 2040 ended virtually flat at 99.95 bid, 99.6 offered.

Brazil remained relatively stable compared to its fellow Latin American credits. Its five-year CDS widened by as much at 6 bps, but came back to end close to unchanged.

The 11% bonds due 2040 were spotted lower by 0.15 at 134.85 bid, 134.9 offered.

The national oil producer Petroleo Brasileiro SA "was definitely down this morning," a trader said.

Petrobras' recently reopened bonds due 2018 widened by 15 bps in early trading, but the afternoon calm reined in the wides to leave the spread out by only 5 bps at 211 bps.

Roadshows continue in resurgent primary

After many questioned the wisdom of bringing so many new issues in one day on Tuesday, "the supply was digested," a syndicate desk official said.

The volume "could be construed as a mixed sign," he admitted.

Still, "you haven't seen anything today," he said, but roadshows continue for Indonesia's benchmark deal, along with a $400 million 10-year bullet from Brazil's Usinas Siderurgicas de Minas Gerais SA.

Pricing for both deals is expected this week.

"I don't think the new issuance was too much for the market to handle, but recessionary fears are," the emerging markets analyst said.

"Indonesia's sovereign should be able to get done if they want to get it done badly enough, but some of the EM corporates may want to shelve their deals until next week given the current volatility in developed markets," he said.

Emerging Europe slips on headlines

Prices in emerging Europe slid lower during trading as recession talk in the United States dampened prices.

"It was very interesting how investment grade names, particularly in eastern Europe, sold off a lot in CDS," a buysider said referring to countries like Bulgaria and South Africa.

Market nervousness is forcing people towards buying relatively cheap protection, the buysider said.

Russia's stabilization fund increased by $68 billion by Jan. 1 to a total of $157 billion during 2007, the Finance Ministry said, according to the Interfax News Agency.

The fund collects windfall oil profits for the national treasury.

The Russian bonds due 2030 added 0.1 to trade at approximately 114.85 bid, 114.95 offered.

The Ukraine's oil producer Naftogaz, which is in technical default, will likely ask for another waiver from its creditors in order to delay payments, a market source said.

The notes due 2009 edged up by 0.2 to 96.7 bid.

Although Turkey was able to find investors for its reopening of the 6.75% bonds due 2018, the price of 103.34 with a spread of 246 bps over Treasuries seemed high, a market source said.

Turkey depends highly on external markets for its critical refinancing needs, the source said.

At the moment its eurobonds are not an attractive investment, the source added.

Turkey's recently retapped bonds due 2018 dropped 0.1 to 103.25 bid.

Turkey's sovereign bonds due 2030 fell 0.7 to 157.05 bid, 157.55 offered.

Asia rebounds in afternoon

Asian trading was mixed after the late-day rebound.

Although, a buyside source noted that trading across all of the emerging markets "could have been worse."

The performance of equities and the volatility in the major markets will continue, the buysider said, and it may begin to take its toll on emerging markets which have largely avoided the spillover.

In the Philippines, the government would stand to lose PHP 54 billion if proposals to exempt oil from the value-added tax are accepted, the Department of Finance said, according to the Manila Times.

With the PHP 54 billion revenues the government would be able to cover 2007's PHP 15 billion budget deficit three times over, the report continued.

The Philippine government bonds due 2030 saw gains of 0.5 to close at 134.375 bid.

Indonesia's sovereigns due 2017 dropped 0.5 to 102 bid.

Pakistan dismissed allegations by International Atomic Energy Agency chief, Mohamed El-Baradei, that its nuclear arsenal is in danger of falling into the hands of radical Islamist groups.

The troubled country asserted that its nuclear weapons are secure in the hands of the army.

The Pakistani bonds due 2017 were quoted in the area of 80 bid.

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