Emerging markets firmer with equities; Fed cut sates the Street; Buenos Aires feeds primary rumor mill

By Aaron Hochman-Zimmerman

New York, March 18 - Emerging markets investors were smiling as U.S. equities ended the day on their way up after the Federal Reserve cut its benchmark rate by 75 basis points to 2.25%.

Goldman Sachs and Lehman Brothers also offered encouraging news by posting earnings reports which beat expectations.

Still, more importantly "the Fed decided to open the discount window to investment banks," a market source said. "That's giving the market the sense that the worst is behind us."

In trading, Argentina took the most advantage of the 420-point gain of the Dow Jones Industrial Average. The discount bonds due 2033 added 3 points during the session.

The capital city of Buenos Aires made the noise in the primary market as investors heard rumors of a possible $500 million issue in May or June.

Volatility took the easy road down, only to plummet lower after the Fed announcement. The VIX index ended lower by 6.45 at 25.79. The index is a frequently used gauge of market volatility.

Treasuries were chopped at the knees as emerging markets ratcheted down by 27 bps to a spread of 300 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will accept to keep money in emerging markets debt.

LatAm up on Holy Week volumes

Liquidity in Latin America was very low during Holy Week, a syndicate desk official said.

"The locals are on vacation and they're the ones who have been driving the market," he said.

Still, prices were up before and generally holding after the Fed cut.

Although, "I can't wait for the profit taking to begin," he said.

In Argentina, the federal government and Buenos Aires mayor Mauricio Macri continued to butt heads as the mayor announced plans to create his own police force, the Buenos Aires Herald reported.

Macri along with security minister Guillermo Montenegro, announced the plan after repeated attempts to bring national law enforcement resources under the city's control, the report said.

The 8.28% Argentine discount bonds due 2033 shot up 3 points to 86.25 bid.

Also, Brazil's highly traded 11% bonds due 2040 were up 1 point to 133.5 bid.

U.K. court releases PDVSA assets

The $12 billion of PDVSA's assets, which were frozen by the High Court in London over a clash with ExxonMobil, were released on Tuesday.

Venezuela's state oil firm as well as president Hugo Chavez consistently asserted that ExxonMobil's claims did not match the amount it lost to a 2007 oil facility nationalization program.

Chavez also accused the U.S. government of supporting the fight against Venezuela.

"That's good news," a syndicate official said about the release of PDVSA's assets, "PDVSA is up on the day."

The PDVSA bonds due 2017 were quoted at 68.75 bid.

The PDVSA bonds due 2027 were quoted at 59.375 bid.

The PDVSA bonds due 2037 were quoted at 58.25 bid.

The Venezuelan 9¼% sovereign bonds due 2027 were spotted at 96.8 bid.

Externals boost emerging Europe

Volumes were low and prices were flat to slightly stronger on Tuesday as equities screamed skyward after the Fed reduced rates 75 bps and major banks Lehman Brothers and Goldman Sachs beat expectations with their earnings reports.

At Russia's economic forum in Switzerland on Tuesday, deputy prime minister Alexander Zhukov spoke about Russia's long-term political stability and economic commodity-based strength.

Russia now placed seventh in world in terms of GDP volume, Zhukov said, according to the Itar-Tass News Agency.

Foreign direct investments hit $28 billion in 2007, Zhukov said, adding that Russia expects to continue to play a large role in the international business community.

The Russian sovereigns due 2030 were spotted at 115.05 bid, 115.2 offered.

Meanwhile in corporates, Russia's Lukoil will increase gas production in Russia by 30% to 15 billion cubic meters this year, according to the RIA Novosti News Agency.

The cost for processing the increase will likely hit 20 billion rubles for the next three years, compared to 15 billion rubles for production during the last five years, the report said.

Also, Russia's Golden Telecom reported a GAAP income increase of 78% to $153 million in 2007.

Meanwhile, Ukraine's government bonds due 2016 were quoted at 97.95 bid, 98.45 offered.

Elsewhere in emerging Europe, Turkey's financial community has been at the edge of its nerves over what the Turkish Daily News called "turmoil due to political uncertainty such as the one in the aftermath of the case unleashed against the governing party."

The turmoil began last Friday as Turkey's court of appeals chief prosecutor, Abdurrahman Yalcinkaya, filed a motion in constitutional court to have the ruling AK party banned for its unconstitutional anti-secular activities.

The charges brought against the AK party include demands that president Abdullah Gul, prime minister Tayyip Erdogan and other party members be barred from public office for five years.

The AK party won the majority in 2002.

The Turkish government bonds due 2030 were spotted at 150.8 bid, 151.3 offered.

Asia stronger, prices hold

Asia reacted well to the dose of external good news during Tuesday's session.

Still, light trading kept prices from moving far, but spreads went reeling in as Treasuries were pushed aside by an equity surge.

In the Philippines, a report by Grant Thornton International cites "the lack of a skilled workforce" as the major limitation on the growth of business, according to a report in the Manila Times.

The survey revealed the lack of skilled labor as a rising problem around the world, replacing concerns over "inhospitable regulations and red tape," the report said.

The study questioned 7,800 respondents, but among those questioned in the Philippines, the issue of skilled labor was considered the primary hindrance by 58% of those polled, compared to 43% in 2007.

The Philippine government bonds due 2030 added 0.875 point to 129.35 bid.

In Indonesia, the government announced a plan to spend more than $12 billion on fuel subsidies in 2008, according to the Jakarta Post.

The addition comes as it seems increasingly unlikely that the government will meet its kerosene-LPG conversion program target.

"It is impossible to achieve 100% success because during these three months there has been no indication of a significant reduction in fuel consumption," the director general for oil and gas at the energy and mineral resources ministry, Luluk Sumiarso, said in the report.

Under presidential regulation number 71/2005 the government is required to provide energy assistance to "special consumers, including households, small firms, fishery business and transportation and public services."

The Indonesian sovereign bonds due 2018 held unchanged at 105 bid.

Meanwhile in Pakistan, violence was on the rise again as 16 were killed by a missile near the Afghan border, according to state television.

Also, a bomb killed one and injured others in an attack apparently directed at tourists in an Italian restaurant in Islamabad.

Foreigners have not been the target of an attack in the capital since 2002, a BBC analyst said.

Also in Asia, India's airport workers went on strike after the privatization of the airports in Bangalore and Hyderabad.

The workers, fearing layoffs, have petitioned the government to leave the national facilities open, but the government will allow the facilities to close in favor of the newer, privately constructed airports.

Workers at the privately held airports in New Delhi and Mumbai will not be on strike.

Whispers on Buenos Aires

Rumors of a $500 million 10-year issue from the City of Buenos Aires lit up the primary market wires on Tuesday.

A market source said the issue will likely price near 11%, but others believe investors will require 12.5%.

A source pointed out that the more liquid bonds of the Province of Buenos Aires due in 2018, which trade in the low 80s, have yields near 12.25% to 12.3%.

Many will not be interested in a bond from the city if it fetches a lower yield than the bonds from the province, the source said.

The issue, which is expected in May or June, will be managed by Citibank, Barclays and Banco Macro.

Public Bank Bhd. announced the offering of 5 billion ringgit lower tier II subordinated notes.

Public Investment Bank will act as the bookrunner for the deal.

The notes come from Public Bank's medium-term note program.

Public Bank is a Kuala Lumpur-based retail and commercial bank.

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