Emerging markets slightly better; rally pace cools; Turkey prices $1 billion

By Aaron Hochman-Zimmerman

New York, Feb. 27 - Emerging markets lost its rally feeling but still managed to post small gains on lighter volumes than the beginning of the week.

Despite the suggestion of further rate cuts from Federal Reserve chairman Ben Bernanke, equities whipped around to end flat.

Investors were also faced with a historic price for the dollar against the euro. The euro was spotted at €1.51 to the dollar.

Emerging markets trading saw no standouts, but the primary market was open for business as Turkey priced a $1 billion 30-year sovereign.

"I think, if anything, flows continue to be lackluster," an emerging markets strategist said.

"We had a nice run on the back of the equity markets," he said about Monday and Tuesday's gains.

"Brazil had a nice little run on the upgrade rumors," he said.

Currencies opened very, very strong, a buyside source said, adding that the currencies fell off in the afternoon but were still "better on the day."

Volatility dropped off midday but came climbing back in the afternoon to end higher by 0.79 at 22.69, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets was wider by 3 basis points to a spread of 263 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging markets debt.

Emerging Europe flattens out

Emerging Europe leveled the upward trend it set at the beginning of the week as equities ran out of momentum to drag credits higher.

Volumes were also tempered as equities lost steam.

In Turkey, Iranian auto manufacturer Iran Khodro removed its investments in Bulgaria and may shift them to Turkey, the Turkish Daily News reported.

If Iran Khodro is able to sell its cars in Turkey, it would later turn its attention to markets in Russia, Ukraine, Bulgaria, Romania and Bosnia, the report said.

Also, despite Iraqi claims that the Turkish offensive against the Kurdistan Workers' Party fighters violates its sovereignty, Turkish officials said the action would continue until the PKK no longer has a base of operations in Iraq.

The Turkish sovereigns due 2030 slipped 0.65 to 152.6 bid, 153.15 offered.

In Russia, VTB Bank opened its first branch in China.

The opening of the office in Shanghai makes it the first Russian bank to have an office in China.

The Kremlin also said it may consider sanctions against Iran if it does not cease actions which may produce nuclear weapons, according to a BBC report.

Elsewhere, OAO Gazprom said it will cut gas headed for Ukraine by 25% if Kiev does not pay its alleged debt by March 3.

The Russian sovereign bonds due 2030 were better by 0.15 at 113.6 bid, 113.75 offered.

The Ukrainian government bonds due 2016 were quoted at 98.75 bid, 99.25 offered.

Turkey prices benchmark

After two sessions at a rally pace and one at a slow improvement, the market was able to produce new paper.

The Republic of Turkey (Ba3//BB-) priced a $1 billion 30-year bond with a coupon of 7¼% to yield 7.55%.

The price matched the talk in the 7.55% area.

Citigroup and HSBC acted as bookrunners for the registered deal.

Turkey will use the proceeds for general budgetary purposes, including the repayment of debt.

Also, the Inter-American Development Bank announced the placement of a $1.5 billion five-year note.

JPMorgan, Morgan Stanley and RBS acted as bookrunners for the deal.

The IADB is a developmental lender focused on economies in Latin America and the Caribbean.

The issuer is based in Washington D.C.

LatAm falls off rally track

Trading in Latin America hit the breaks after a nice run alongside equity success.

Volumes continued at a measured pace, while prices slipped.

"We had some money put to work," a strategist said, adding the rally was nothing to get overly excited about.

In Argentina, president Cristina Kirchner announced that the national power grid has added 2,500 megawatts, or 11%, more power to the country's energy supply, according to a report in the Buenos Aires Herald.

Kirchner's speech attempted to calm fears of an energy crisis, but she did not admit that energy was a major problem, the report said.

She characterized the need for energy as a problem the entire world faces, rather than Argentina.

The 8.28% Argentine discount bonds due 2033 lost 0.25 to 89 bid, 89.5 offered.

Venezuela's sovereign bonds due 2027 were lower by 1 point at 98.75 bid, 99 offered.

Brazil's 11% government bonds were better by 0.35 to trade at 133.6 bid, 133.7 offered. The 7 1/8% bonds due 2037 were quoted at 107.4 bid, 107.8 offered.

Asia slightly firmer

Prices of Asian issues calmed and volumes retreated as equities did not provide the same motivated leadership as they had on Monday and Tuesday.

In the Philippines, disappointing industrial and agricultural output forced the National Economic and Development Authority (NEDA) to revise its outlook for the first quarter, the Manila Times reported.

NEDA said the economy will grow at 6% in the first quarter rather than the 7% it earlier predicted.

The 7% growth was anticipated as a continuation of the 7.4% growth seen in the fourth quarter of 2007.

The Philippine government bonds due 2030 tacked on 0.25 to 129.25 bid, 129.3 offered.

The poor and deteriorating condition of Indonesia's road infrastructure hampers its economic competitiveness, said a deputy to the coordinating minister for the economy for infrastructure and regional development, according to the Jakarta Post.

Indonesia's transportation infrastructure ranked 91 of 131 countries surveyed by the World Economic Forum.

Still the country's overall competitiveness ranked 54 of 131, the report said.

The Indonesian sovereigns due 2018 added 0.375 to 104.25 bid, 104.6 offered.

Pakistan's new leadership should use caution regarding talks with the country's militant groups, U.S. defense secretary Robert Gates said in India on Wednesday.

The Pakistani bonds due 2017 were quoted at 86.5 bid, 88.5 offered.

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