Emerging markets beaten back; Equities, externals drag on prices; Volumes stay low

By Aaron Hochman-Zimmerman

New York, March 6 - Emerging markets suffered a day of lower prices and wider spreads as stocks burrowed lower.

"I think the market feels extremely heavy," an emerging markets strategist said, although, "I'm not seeing sell orders from our customers."

"As a result of that, we're talking about spreads out a fairly good amount," he said.

The headlines showed the mortgage crisis deepening, as 0.83% of mortgages foreclosed in the fourth quarter. The news helped sink both equities and credits.

"It's all external," the strategist said.

Still, emerging market bond funds took in $174 million during the week ended on Wednesday, according to EPFR Global.

The gains represent the third straight week of inflows.

In trading, Turkey led the way down, dropping 1.875 points on its benchmark bonds due 2030.

"People are deleveraging, hedging some of their positions," a buyside source said. "People are buying protection."

Volatility made a steady climb during the session, ending higher by 2.95 at 27.55, according to the VIX index. The index is a common measure of market volatility.

Treasuries made up for recent losses as emerging markets was pushed wider by 11 basis points to a spread of 288 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to keep assets in emerging markets debt.

Emerging Europe slides on U.S. data

Prices in emerging Europe were hit by dropping equities and another dose of bad news from the U.S. housing market.

Volumes remained fairly light as spreads stretched wider.

Meanwhile, the gas crisis between Russia and Ukraine is over, according to a joint OAO Gazprom and NAK Naftogaz Ukrainy press release.

"The parties have agreed that the gas delivered between Jan. 1, 2008 and March 1, 2008 will be fully confirmed by relevant documents and paid by NAK Naftogaz Ukrainy in accordance with the delivery scheme effective as of the beginning of the year ... The negotiations on other matters in respect of cooperation in the gas area will be continued," the press release said.

"The transit of the Russian gas across the territory of Ukraine for the European customers remains in full," the release continued.

Also, Russia's Lukoil intends to keep 15.7 billion barrels of oil and 27.9 trillion cubic meters of natural gas in reserve, according to the Itar-Tass News Agency.

The Russian sovereigns due 2030 lost 0.25 point to 114.5 bid, 114.875 offered.

Elsewhere, Kazakhstan and Ukraine announced their intensions to expand cooperation in the energy sector.

Meanwhile, Turkey's economic growth is likely to slow in 2008, the World Bank said, according to the Turkish Daily News.

The GNP, which has yet to be published, is expected to climb only 4% or 4.5%, lower than the target growth of 5%.

To improve its growth, Turkey must continue to attract foreign investment, the report said.

In 2007, Turkey saw $22 billion of inflows from foreign accounts.

The Turkish sovereigns due 2030 dumped 1.875 points to 150.25 bid, 150.75 offered.

Bulgaria's issue due 2015 was one of the few issues to hold steady during Thursday's difficult session, a buyside source said.

The bonds were spotted flat at 118 bid, 119 offered.

Externals weigh on LatAm

Latin America saw light volumes and retreating prices as the global markets were faced with more contagion from the U.S. mortgage crisis.

"Argentina was the under performer," a buyside source said.

The 8.28% discount bonds due 2033 dropped 1.45 points to 88.05 bid, 88.25 offered.

Brazil's 11% government bonds due 2040 fell 0.1 point to 133.4 bid, 133.85 offered.

The 7 1/8% Brazilian bonds due 2037 were lower by 0.45 point at 107.5 bid, 107.75 offered.

In corporates, Brazil's JBS SA issued $1.5 billion in new stock to pay for the acquisition of meat processing companies in the United States and Australia, according to a market source.

Meanwhile, prices of Brazil's Friboi were falling.

The meat processor's issue due 2016 was seen down 1 point at 96.875 bid, 97 offered.

Also in corporates, Venezuela's state oil firm PDVSA will not be allowed to refinance $1 billion in debt related to the Sincor project unless a court in the United Kingdom releases its frozen $12 billion in assets, a market source said.

The Sincor or Petrocedeno project was undertaken with France's Total and Norway's StatoilHydro.

Along with PDVSA's legal trouble, the firm is less liquid that record high oil prices would indicate, the source said.

Light sweet crude was seen trading at $105.35 per barrel.

As a whole, the larger macroeconomic conditions in Venezuela continue to deteriorate as well, the source said.

Ecuador, Venezuela condemn Colombia

As their troops remain on Colombia's borders, Ecuador and Venezuela appealed to the Organization of American States for a formal condemnation of Colombia's raid into Ecuador, which killed FARC leader Rual Reyes on Saturday.

Colombia issued an apology to Ecuador for crossing the border but insisted that the attack was necessary to combat the FARC, which Colombia views as a terrorist group.

Ecuador has rejected the apology.

Many market watchers believe the conflict will remain on the diplomatic level, rather than break into further military action.

The 9¼% Venezuelan bonds due 2027 fell 1.1 points to 96.4 bid, 97.25 offered.

The 7 3/8% Colombian bonds due 2017 were spotted at 109.2 bid, 109.9 offered.

The 8% Ecuadorian bonds due 2030 were lower by 0.65 point to 96 bid, 96.75 offered.

The FARC conflict has not played a significant roll in price changes, a portfolio manager said, and "market events more so" have driven prices and spreads.

Primary shows glimmers of life

The primary market has kept on its feet with recent deals from Asia.

Korea's Kexim recently priced 1 billion ringgit in two tranches, while Korea's KT Corp. priced 100 billion won.

However, "the environment cannot be construed as a positive environment," a strategist said.

Brazil's Banco BMG provided the action on Wednesday with its $100 million two-year offering.

Still, "I'm not so sure its going to get done," the strategist said.

"Maybe Banco BMG can wait" to issue, a buysider said.

"It would seem like they would come to market because their business is growing," he said.

The bank's success is based on its innovative system of financing loans, he said.

"They lend and then the loan is paid from the salaries of the employees," he said.

Asia slower, wider

On light volumes, Asian spreads were wider as Treasuries advanced in the United States.

In the Philippines, the government's development and budget coordinating committee suggested cutting subsidies for quasi-sovereigns and financial institutions to near PHP 11 billion from PHP 25 billion in 2007, according to the Manila Times.

The plan comes as the government is making a greater push to balance the budget.

Indonesia's House of Representatives held a hearing to determine the next governor of Bank Indonesia, according to the Jakarta Post.

The two candidates are president director Agus Martowardojo of Bank Mandiri and the vice president of the asset management company Perusahaan Pengelola Aset, Raden Pardede.

The new governor will serve for five years.

Karachi, Pakistan, suffered a citywide power outage on Thursday.

Power was returned in certain areas and is expected to be fully restored in the coming days.

The utility firm Wapda ceased its 300-megawatt output over a $554 million debt it is owed by the government of Karachi, the BBC reported.

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