Emerging markets end mixed; equities lose rally pace; Buenos Aires issues rumored

By Aaron Hochman-Zimmerman

New York, March 12 - Emerging markets held close to unchanged as equities slid and Treasuries advanced, pulling spreads wider across the sector.

Volumes were light and are expected only to shrink as the calendar heads toward Holy Week and the Federal Open Market Committee meeting on March 18.

Many investors are expecting a 50 basis point cut; some others are watching for a 75 bps reduction, but most importantly, sources agree that the Fed's primary job is not to disappoint.

"I think they will cut half, and that will make no change," a portfolio manager said.

The $200 billion injection was "a good attempt," he said, "Like the two or three attempts beforehand."

It led to some inflows in emerging Europe and "especially Latin America," he said.

In trading, "all the high-beta credits are under pressure," a strategist said.

"Argentina is wider," he said as the discount bonds due 2033 gave back 0.75 point.

"The high-grade credits like the BB+ seem to be doing OK," he said.

"Liquidity is a problem," he said, although "we remain contained ... I don't see any desire to sell."

"It's very difficult to sell paper that's not on the run," he added.

Meanwhile, Wednesday's rumors of new issues put the city and the province of Buenos Aires in the spotlight. An issue from the province may come by the end of May, a strategist said.

Volatility declined early in the day, but mounted a comeback to end higher by 0.86 at 27.22, according to the VIX index. The index is a frequently used gauge of market volatility.

Treasuries jumped throwing emerging markets wider by 10 bps to a spread of 298 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors require to keep money in emerging markets debt.

Emerging Europe mixed

Prices in emerging Europe were mixed, but spreads widened toward the end of the session.

Volumes remained light as the bounce in equities turned southward, although the rally was enough for the sector to take on some inflows, a portfolio manager said, although the interest was heavily short term.

"It's just the very short end, people are not looking out more than three or four years," he said.

"There is new demand on the short end in Russia," he said, citing the positive outlook it was given by Standard & Poor's.

Also, the Russian government offered assurances that rising housing prices will not outpace inflation rates, said regional affairs minister Dmitry Kozak, the Itar-Tass News Agency reported.

"The measures we have proposed with the aim of expanding the supply of housing will make it possible to keep prices within the inflation parameters," he said.

The Russian sovereign bonds due 2030 slipped 0.25 point to 114.5 bid, 115 offered.

Meanwhile in Ukraine, prime minister Yulia Timoshenko said the country will not pay more than $179.5 per 1,000 cubic meters of Russian gas in response to charges that the price would rise to $300 per cubic meter, Itar-Tass reported.

Timoshenko added that the price paid for Central Asian gas would not exceed $130 per cubic meter.

The Ukrainian sovereigns due 2016 were quoted at 98 bid, 98.5 offered. The euro-denominated bonds due 2015 were spotted at 87 bid, 88.5 offered.

In Turkey's real estate sector, people have too little money saved for the construction sector to produce properties in greater numbers, said the head of the Agaoglu Group, Ali Agaoglu, according to the Turkish Daily News.

The problem is not an overabundance of supply, but the lack of spending power on the part of the consumer, he said. However, prices in Istanbul are still some of the lowest in Europe's major cities, he said.

The Turkish sovereign bonds due 2030 added on 0.75 point to 151 bid, 151.5 offered.

LatAm eases toward Holy Week

Prices in Latin America held, but volumes were light despite the early successes, a strategist said.

Issues were damaged slightly by the end-of-day slide in equities, but the light volumes prevented harsh movement.

The volumes are also expected to trail off further into the end of the week as investors will likely sit back and wait for the Fed's rate cut decision on Tuesday, the strategist said, adding that next week is also Holy Week for many people, especially in Latin America.

In Argentina, the government announced it will raise export taxes on soy and sunseed products by 7% to 9%, the Buenos Aires Herald reported.

Taxes on corn and wheat are expected to drop by 1%.

"They're trying to force a diversification away from soy," the strategist said.

The 8.28% discount bonds due 2033 dumped 0.75 point and were quoted at 87.5 bid, 88 offered.

Elsewhere in Latin America, Venezuela's 9¼% government bonds due 2027 were spotted unchanged at 97.5 bid, 98 offered.

Buenos Aires draws primary rumors

Aside from a recent S$425 million offer from Malaysia's AmBank, the primary has been an empty stage.

"Anyone who was thinking about it saw the volatility and pulled back," a syndicate desk official said about the last few weeks.

Wednesday's rumors of new issues put the city and the province of Buenos Aires in the spotlight.

"People view the city as a better credit," the syndicate official said.

An issue from the province may come by the end of May, a strategist said.

Vale railway blocked

A railway belonging to Brazil's Companhia Vale do Rio Doce SA was blocked by farmers for hours until a court order was obtained to have them removed, according to the BBC.

The farmers blocked the rail in protest over CVRD's construction of a new dam.

There is a rising popular movement within Brazil against multinational companies, the report said.

The conflicts between the farmers and corporations have been ongoing for some time with hardly any significant damage to corporate interests, the strategist said.

The 11% Brazilian government bonds due 2040 were better by 0.8 point to 133.6 bid, 133.8 offered. The 7 1/8% bonds due 2037 added on 0.25 point to 107.35 bid, 107.9 offered.

Asia slides on thin volume

Asia slipped on a light day of trading as equities gave back their gains from the G-10 bank infusion.

The Philippines took advantage of the rising value of the peso to pay down its debt by PHP 100 billion to PHP 3.7 trillion by the end of 2007, according a Bureau of Treasury press release.

Domestic investors hold PHP 2.2 trillion of the government's debt, while foreigners hold PHP 1.5 trillion of the outstanding debt.

In 2007, in order to curb inflation, the government borrowed more domestically and lowered its international borrowing, the release said.

The Philippine government bonds due 2030 lost just 0.125 point to 128.625 bid, 129.125 offered.

In Indonesia, the central bank's independence from the government may be a contentious issue in the 2009 election cycle, reports the Jakarta Post.

The bank has been reluctant to buy treasury bills against the government's wishes.

The purchase of the bills would help reduce the budget deficit, but forcing the banks hand is illegal, said Bank Danamon's Anton Gunawan.

The government may try to issue securities to temporarily shore up the economy and unemployment figures ahead of the elections, Gunawan said.

The Indonesian sovereigns due 2018 fell 0.325 point to 105.125 bid, 105.625 offered.

Also in Asia, Pakistan's new parliament will meet for the first time on March 17, according to the BBC.

The coalition of the opposition parties, the Pakistan Muslim League and the Pakistan Peoples' Party, will assume cabinet posts and will ask for the return of the judges fired by president Pervez Musharraf.

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