Emerging markets softer; light volumes flatten prices; Petrobras pulls $500 million retap

By Aaron Hochman-Zimmerman

New York, Feb. 11 - Emerging markets began the week slowly with low volumes and a weaker tone.

For most of the day, Brazil's Petroleo Brasileiro SA carried the attention of investors until later into the afternoon when the company shelved the proposed $500 million retap of its 6 1/8% notes due 2016.

Russia's bonds due 2030 traded nearly flat even as the country agreed to write off $12 billion of Saddam-era debt from Iraq.

Meanwhile, Russia's OAO Gazprom again threatened to cut off oil supplies to Ukraine if Kiev's alleged $1.5 billion debt is not paid by Tuesday.

Volatility rocketed toward 30.00 shortly after the open, but trailed off into the afternoon to close lower by 0.41 at 27.60, according to the VIX index. The index is a leading indicator of market volatility.

LatAm mixed on light volumes

On what was "one of the slowest days of the new year," according to a trader, prices in Latin American trading were mixed.

The trader blamed the low volumes on sluggish Monday investors who are looking ahead to find the next market event.

Still, Petrobras made a splash with its abortive retap, but had it gone through "it doesn't matter," a trader said.

The oil giant is too big to be a harbinger of new deals to come, the trader said.

Brazil's state-run oil company, Petrobras, traded higher on the news of its reopening of its notes due 2018.

Petrobras' 5 7/8% notes due 2018 were quoted at 102.75 bid, 102.875 offered.

The 7 1/8% Brazilian sovereigns due 2037 added 0.3 to trade at 106 bid, 106.5 offered.

The 11% bonds due 2040 were spotted at 132.60 bid, 132.65 offered.

In Venezuela, vocal president Hugo Chavez threatened to break off oil shipments to the United States if it does not stop what Chavez sees as a legal offensive against Venezuela.

Chavez made the statements in a reaction to Thursday's freezing of a total of $12 billion in assets by courts in the United States, United Kingdom and the Netherlands.

Venezuela's benchmark bond due 2027 has traded poorly in recent sessions in light of the court order, a trader said, but prices staged a mild rebound on Monday.

The 9¼% Venezuelan sovereigns due 2027 were up 0.85 to trade at 98.25 bid, 98.5 offered.

Argentina's 8.28% discount bonds due 2033 held flat at 89 bid, 89.5 offered.

Colombia's 7 3/8% sovereigns due 2017 were quoted at 108 bid, 108.7 offered.

Honduras struck an agreement with the International Monetary Fund and the United States to keep its budget deficit to 1.5% of its GDP, according to an IMF press release.

The plan is intended to "provide room for an increase in public investment while keeping the public debt stable," according to the release.

Elsewhere, Uruguay president Tabare Vazquez fired six cabinet ministers on Monday.

The replacements will assume their new offices on March 1, according to the BBC.

Vazquez made the move to preserve his party's influence in the government ahead of elections, but the move may jeopardize relations with neighbor Argentina, a BBC analyst said.

Petrobras comes and goes

Amidst a slow and churning market, Petrobras emerged with a $500 million offering but quickly pulled back citing volatile market conditions.

The new paper was not a cause for alarm or an expectation that more new issuance will follow, a trader said.

Because of its size and stability, "they can do whatever they want," he said, before the pull-out of the $500 million reopening of the 6 1/8% 10-year global notes (BBB-/BBB-) was announced.

Initial guidance for the deal had been widened to Treasuries plus 220 bps from 210 bps.

BNP Paribas and Morgan Stanley were asked to act as bookrunners.

The existing notes are due Oct. 6, 2018.

The add-on would have made the total size of the issue $1 billion. The original $500 million offering was priced on Sept. 29, 2006.

Petrobras is a Rio de Janeiro-based government-run oil producer.

Emerging Europe slips quietly

With equities down during the overseas session and little motivation carried over from Friday, emerging Europe continued downward on Monday.

"It's very quiet," a portfolio manager said, "We don't see any selling."

Ukraine has until Tuesday to settle a $1.5 billion debt, according to Russia's state-run oil giant OAO Gazprom, which extended the deadline 24 hours on Monday.

Gazprom threatened to shut off the gas if the debt is not paid.

"That put the prices down," the portfolio manager said about the Russian threats.

Representatives from Gazprom and the Ukrainian state-run oil firm Naftogaz Ukrainy met on Friday but could not reach an agreement.

The Ukrainian government bonds due 2016 fell 0.7 to trade at 99.7 bid, 100.375 offered.

The Naftogaz Ukrainy notes due 2009 were off 2.5 to trade near 95 bid, 96.5 offered.

In Russia, finance minister Alexei Kudrin agreed to write off $12 billion of debt accrued by Saddam-era Iraq.

In exchange, Russia's Lukoil will be given rights to invest $4 billion in the development of Iraqi oil.

Kudrin also announced the Russian GDP may hit 7% in 2008. Previous GDP estimates only reached 6.6%.

Russia's economy is tied to the global economy, and further difficulties will cause damage, he said.

The Russian sovereign bonds due 2030 were lower by just 0.1 to trade at 114.35 bid, 114.45 offered.

Meanwhile, Turkey's GDP will surpass $500 billion for the first time if the fourth-quarter growth rate is 2.6% or higher.

The GDP for the first three quarters of 2007 reached $467 billion, according to the Turkish Daily News.

The estimated GDP for 2007 was $489 billion.

The Turkish government bonds due 2030 lost 1.05 to trade at 153.9 bid, 154.15 offered.

Elsewhere in emerging Europe, Serbia president Boris Tadic warned of greater conflicts if Kosovo separates itself from Serbia later in February.

The typically pro-Western president said the decision should rest with the Belgrade government.

The United States and European Union support Kosovo's independence.

In South Africa, the power crisis is "really weighing on the market," an emerging markets strategist said.

"The mood there is very very gloomy," the strategist said, adding: "There doesn't seem to be a good immediate fix."

The investment in infrastructure is coming much too late, the strategist said as many estimates figure the problem may see a resolution no earlier than 2013.

Asia weaker on 'lazy Monday'

Asian trading was light as the U.S. market could react to an overnight session for the first time since the Lunar New Year began on Thursday.

"Asia wasn't able to react to the negative news coming out of the U.S.," a trader said about the end of last week.

Sentiment was "pretty weak" on both sides of the ocean, he said, although trading in the United States recovered "a little bit" with the success of equities on Monday.

Overall, prices were only slightly lower and volumes were shallow on what the trader described as "a pretty lazy Monday."

In the Philippines, the budget deficit reached PHP 9.4 billion, a nine-year low, the Department of Finance said, according to the Manila Times.

The deficit for 2007 was expected at PHP 63 billion.

The deficit only represented 0.1% of the GDP, compared to the 0.9% economists anticipated, the report said.

The Philippine sovereign bonds due 2030 gained just 0.125 to trade at 130.875 bid.

In Indonesia, Bank Indonesia predicted that loans in 2008 will predominantly be taken for investment in the development of the country's infrastructure.

The production of coal, palm oil and sugar are sectors that will likely see added investment, according to the Jakarta Post.

Commodity prices will drive industry growth for coal and palm oil, while the search for alternative sources of energy will help bolster prices of sugar.

The Indonesian government bonds due 2018 were seen up by 0.25 to trade at 103 bid.

One of Pakistan's prominent militant groups has entered into a truce with the government in South Waziristan.

There are few details about the stoppage of hostilities, according to the BBC.

The Pakistani sovereigns due 2017 were quoted at 86 bid.

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