Emerging markets end flat to weaker; credits follow stocks down; Gazprom rumored in primary

By Aaron Hochman-Zimmerman

New York, Feb. 19 - The tone in emerging markets was encouraged early on by a small lift in equities, but as equities sank, prices in emerging markets were pulled back to Earth.

Spreads were able to tighten slightly as Treasuries were headed lower.

Trading produced no big winners or losers, but the primary market was kicked up again with rumors of a $2 billion offer from Russia's OAO Gazprom.

A weekend busy with news from Kosovo's independence from Serbia, to elections in Pakistan, to the long-anticipated departure from power of Cuba's Fidel Castro was capped by a $2.7 billion write down from Credit Suisse that only added more weight to a heavy market tone.

"The Itraxx remains at distressed levels," and "external forces" are governing the market, an emerging markets strategist said.

"There's very little else to be said about that," he added.

"My market's been looking for an excuse to trade lower or wider," said a trader specializing in emerging Europe.

"It's kind of a confusing picture really," he said.

Volatility stepped slightly higher as equities bounced and finally fell. The VIX index closed up by 0.57 at 25.59. The index is a commonly used measure of market volatility.

Emerging markets as a sector was wider by 2 basis points at a spread of 277 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will require to keep money in emerging markets debt.

Emerging Europe inches wider

Emerging Europe traded at a Monday pace as "you guys were off yesterday," a trader in London said about the Presidents Day holiday in the United States.

"There's very little trading," he said.

"It's a bit of a turbulent time," he said, "All the measures, the VIX and the credit indices are volatile."

Since the beginning of February, the trader calculated, "spreads are wider."

"There's not a huge change in cash prices," he said.

"It's all wider between 10 [bps], 15 [bps] and 30 [bps]," he said.

In Russia, OAO Gazprom reported lower profits in the first nine months of 2007 as compared to 2006.

Profits of 611 billion rubles were reported, compared to 622 billion rubles during the same period of 2006, according to Gazprom's web site.

Gazprom chairman Alexei Miller will visit Kyrgyzstan to meet with president Kurmanbek Bakiyev to discuss energy development of Kyrgyz oil, the Itar-Tass News Agency reported.

If natural gas fields are discovered, Gazprom is prepared to invest up to $300 million in what may become a joint effort.

The Russian bonds due 2030 fell 0.25 to 113.625 bid, 113.75 offered.

In Ukraine, political squabbles over the country's membership in NATO have gridlocked the parliament, according to the Itar-Tass News Agency.

The gridlock has put pressure on president Viktor Yushchenko, who has the right to dissolve parliament within the next 30 days.

The Ukrainian bonds due 2016 slipped just 0.05 to trade at 99.8 bid, 100.3 offered.

Turkey is expecting to suffer a wheat crop that is smaller by 10% for the period of 2007 to 2008, said the United Nations' Food and Agriculture Organization, according to the Turkish Daily News.

Globally wheat crops are expected to grow by 31 million tons, the FAO said.

The Turkish bonds due 2030 were spotted unchanged at 154 bid, 154.125 offered.

Kosovo has been recognized as an independent nation by the United States and a number of E.U. nations over the objections of Russia and China.

Protests have broken out with no reported injuries, but NATO peacekeepers were deployed to border crossing areas after the crossings were burned by Kosovar Serbs.

Serbia's credit rating was not affected by the split.

The Serbian bonds due 2024 were quoted at 94 bid, 95 offered.

In Kenya, civil unrest has been a detriment to the tea harvest, which is expected to shrink by 10%, according to a study prepared by the United Nations' Food and Agriculture Organization for the Global Dubai Tea Forum, according to a press release.

Tea prices are likely to continue higher in 2008.

"The market fundamentals for 2007 suggest that this trend is likely to continue as the FAO Index has increased a further 6.5% to $1.95 per kilogram in 2007," the release said.

LatAm follows equities up, then flattens

Latin American trading was quiet on the first day back after a long weekend in the United States.

"We're not seeing demand for paper at these levels," an emerging markets strategist said.

"Early this morning, following the equity markets we saw some signs of buying," he said, "but it turned again."

Still, spreads were slightly tighter across the board, "maybe Mexico was unchanged to slightly wider; the Venezuela '27s were tighter by about 5 [bps] to 8 [bps]," he said.

Exxon Mobil Corp. is reportedly willing to negotiate with the Caracas government over the $12 billion recently frozen by court order, the Buenos Aires Herald reported.

The 9¼% Venezuelan bonds due 2027 were better by 0.1 to trade at 99 bid, 99.5 offered.

Argentina's 8.28% discount bonds due 2033 slid just 0.05 to trade at 88.25 bid, 88.75 offered.

Brazil's 11% Brazilian bonds due 2040 were seen unchanged at 132.2 bid, 132.3 offered. The 7 1/8% bonds due 2037 fell 0.75 to trade at 104.5 bid, 105 offered.

In Cuba, 49-year president Fidel Castro will step down from his office on Sunday.

The legislature is widely assumed to select Raul Castro as the next president.

Castro's retirement roused the debate over the lingering Cold War economic embargo placed on the island by the United States, but "Castro is really irrelevant," the strategist said.

Gazprom rumors gain steam

Rumors from Russia's OAO Gazprom were again heard around the primary market.

The suspected deal will be for $2 billion and arrive in March or April, a strategist said.

"There's always that overhang, that threat of new issuance," a trader said.

"I don't buy it," the trader said, adding that the same story has been told for the last two or three months.

"If this time it does come, we're going to get cheap bonds," he said.

Elsewhere, China Petroleum & Chemical Corp. (AAA, local) (Sinopec) plans to issue a 30 billion yuan six-year bond with two-year warrants.

The bonds will carry a coupon rate between 0.8% and 1.5%.

A holder of a lot of 10 bonds will be entitled to 101 A shares. The ratio of exercise rights for the warrants is 2 to 1.

Sinopec is a Beijing-based energy and chemical company.

Low volumes, poor tone in Asia

Asian trading was quiet as the prevailing market tone prohibited a large amount of buying.

In the Philippines, a balanced budget is expected in 2008 by Standard & Poor's, the Manila Times reported.

Also, the customs office reported it missed its target collection figure for 2007.

The strength of the peso was the primary factor blamed for the loss of PHP 43 billion in revenues.

The government of Indonesia intends to renegotiate contracts with its oil and gas operators as high prices have brought on higher revenues, the Jakarta Post reported.

Oil was seen trading at more than $100 per barrel Tuesday.

Pakistan's opposition parties claimed victory in Monday's parliamentary elections.

Between the two parties the opposition holds two-thirds of the parliament, which is enough to impeach the increasingly unpopular president Pervez Musharraf.

Results are still being tallied, but Musharraf has never been in a weaker position, according to a BBC analyst.

In China, January's inflation figures surpassed an 11-year record on the heels of the devastating round of winter weather.

Food prices were thought to raise consumer inflation to 7.1% from 6.5% in December, and food prices themselves were higher by 18%.

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