Emerging markets mixed on holidays; Argentina, South Africa hurting; primary has potential

By Aaron Hochman-Zimmerman

New York, Feb. 6 - Emerging markets prices managed to stay mixed as low liquidity kept investors sitting on their hands.

The holidays ensured the thin volumes as many market watchers in Asia celebrated the Lunar New Year and Christians all over the world celebrated Ash Wednesday.

In trading, Argentina led the losers among the high-betas as it lost 1 point from its discount bonds due 2033.

Meanwhile, South Africa's spreads were pulled wider still as persistent power outages left industry and homes darkened.

The primary produced nothing but hope that the $8 billion worth of issuance clogged in the pipeline will begin to flow.

Volatility found its way lower at the open but came climbing back in the afternoon to close up 0.73 at 28.97, according to the VIX index. The index is a frequently used yardstick of market volatility.

Emerging Europe sits on sidelines

Emerging Europe kept volumes light as equities in Europe took another beating on Wednesday.

Investors were happy to sit out and watch the action play out in the major markets, a strategist said.

Russia and Uzbekistan agreed to update a Soviet-era natural gas pipeline, which will reinforce the Kremlin's power over the region's energy resources, according to a report from the RIA Novosti News Agency.

The pipeline is expected to carry 50 billion cubic meters per day, up from its current 20 billion cubic meters.

President Vladimir Putin also expects the cooperation of Kazakhstan and Turkmenistan where the pipeline will travel on its way to Russia.

The Russian government bonds due 2030 were quoted flat at 115.125 bid, 115.375 offered.

Ukraine's new membership in the World Trade Organization will improve the country's GDP by 1.7%, according to president Viktor Yushchenko's web site.

New investments in the Ukraine should rise 40% along with a 10% to 11% increase in exports, Yushchenko said.

The WTO membership should also help pave the way to establishing a free trade zone with the European Union, which would allow the free movement of goods, services, capital and labor.

South Africa continues to suffer in the darkness of failing power grids.

"It's really coming apart, the power crisis is at the fore of everyone's thinking," a strategist said.

"There're rumors about shortages in gas and shortages in water," the strategist said, adding that it is difficult to determine what is true.

"The mines are shut down," and "the future looks pretty tricky for a while," the strategist said.

"The rand is off pretty significantly," the strategist said.

The rand was seen trading at 7.693 to the dollar.

South Africa's five-year CDS was seen trading at 180 bps, 50 basis points wider than a week ago and almost 100 bps wider than December 2007.

In corporates, mobile phone operator Cell C has performed well since its takeover by Saudi Arabia's Saudi Oger. The euro-based issues due 2012 were quoted at 95.5 bid, 97 offered.

Clothing retailer Edcon Ltd. "fell off the cliff three weeks ago," the strategist said.

The Edcon notes due 2014 were unchanged on Wednesday at 65.5 bid, 66.5 offered.

Turkey's foreign investors made $26.7 billion in profit in Turkey's Istanbul Stock Exchange (IMKB) in 2007, according to the Turkish Daily News.

Foreign investors now own 72% of the stock on the IMKB, compared to 55% in 2004.

The Turkish sovereign bonds due 2030 added 0.4 to trade at 156.125 bid, 156.375 offered.

LatAm quiet on Ash Wednesday

Ash Wednesday left investors silent across Latin America, while prices were flat on another day of low volumes.

"It is approaching the end of vacation time" in Latin America, a strategist said, "People are sitting tight."

"Admittedly it's pretty light on the interest frankly", the strategist said about investors' indifference to market news.

Argentina's government insiders were squabbling over comments made by former Radical party president Raul Alfonsin calling for former finance minister Roberto Lavagna to be a co-finance minister with Martin Lousteau.

Cabinet chief Alberto Fernandez shrugged off Alfonsin.

"What Alfonsin says is pure fantasy ... The economy minister is Martin Lousteau," he said, according to the Buenos Aires Herald.

President Cristina Kirchner and her husband Nestor Kirchner may look to support their power base with a reorganization of their Peronist party, the report said.

"There seems to be something going on," a strategist said.

Also, the International Monetary Fund may demand to see Argentina's method for calculating inflation, the strategist said.

The Argentine 8.28% discount bonds due 2033 fell 1 point to 91 bid.

In Venezuela, the 9.25% sovereigns due 2027 lost 0.2 to trade at 101.25 bid.

Brazil, which led the losers on Tuesday, made up ground during Wednesday's trading.

The 11% bonds due 2040 added 0.1 to trade at approximately 134 bid. The 7.125% bonds due 2037 also added 0.1 to trade at 108 bid.

Asia trades lightly as New Year begins

Asia was subject to a difficult overnight session overseas, which along with New Year's celebrations kept volumes light and prices reined in.

In the Philippines, president Gloria Arroyo asked the department of trade and industry to begin a program to lower energy prices, the Manila Times reported.

The government is seeking to lower the return on rate base to 12% from 16%.

Also, the Makati Business Club asked the government to halt its plans for a temporary suspension of the value-added tax on oil.

The group estimates PHP 27 billion in lost revenue if the tax is suspended for six months.

The Philippine government bonds due 2030 lost 0.5 to trade at 131.5 bid, 131.875 offered.

In Indonesia, Bank Indonesia plans to sell all if its shares of a certain company by the end of 2008 in order to comply with central bank rules, according to the Jakarta Post.

The sell-off would affect shares of Indover Bank, PT Asuransi Kredit Indonesia and Bahana Pembinaan Usaha Indonesia.

Indonesia's sovereign bonds due 2018 were quoted unchanged at 103.25 bid, 103.75 offered.

As the lunar New Year began, China was still working to repair infrastructure and deliver water and electricity to its residents.

The military has sent electricians and soldiers to help repair the power grid in Chenzhou, where the city's 4 million residents have gone 12 days without power.

Primary lies in wait

The emerging markets primary made not a whisper on Wednesday, but with a pipeline full of more than $8 billion of offerings, "things are definitely going to happen," a syndicate desk official said.

If anything happens in the near term it will likely come from Central America or Brazil, he said.

Before the recent round of volatility, a dollar issue was expected from Brazil's Banco Cruzeiro do Sul.

The 18-month bonds were talked at 7½%.

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