Emerging markets trade flat; holiday volumes slow to go; primary hushed

By Aaron Hochman-Zimmerman

New York, March 25 - Emerging markets held steady as investors showed some post-holiday weariness amid the low liquidity.

Externally, the Federal Reserve released another $50 billion under its term auction facility, but the larger market concern was more for the headlines from Merrill Lynch and U.S. housing prices.

Still, in emerging markets "it was a pretty boring today to be quite honest," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The sluggishness came from "the remnants of what we had yesterday," he said on Tuesday about Monday's international market closings.

In trading, no outstanding performers took the lead in either direction, but quiet trading was only outdone by an even more restrained primary.

After a mixed day, volatility only lost 0.01 to close at 25.72, according to the VIX index. The index is a common gauge of market volatility.

Similarly, as a sector emerging markets only widened by 2 basis points to a spread of 297 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will expect to keep assets in emerging markets debt.

Emerging Europe slowly resumes trading

Emerging Europe spent the day playing catch up with Latin America, a market source said.

Spreads tightened slightly as equities' late success fought off Treasury gains.

In Russia, prime minister Viktor Zubkov asked the ministry of economic development for a "calculated and well-reasoned" plan for tax cuts, including a cut to the value-added tax.

The proposal from the ministry is expected in August.

Meanwhile, in Novo-Ogaryovo, Russia president Vladimir Putin and Egypt president Hosni Mubarak signed a nuclear cooperation treaty.

The treaty only deals with civilian uses of nuclear energy.

Russia has already expressed interest in building a nuclear plant in Egypt, which is looking to replace some of its oil consumption with the use of nuclear energy.

Russia's nuclear service monopoly Atomstroyexport is building nuclear facilities in China, India and Iran. Other projects may follow in Bulgaria, Morocco, Vietnam and South Africa, according to the RIA Novosti News Agency.

While Russia strengthened ties with Egypt, president-elect Dmitry Medvedev expressed his disapproval of its neighbors and former-Soviet republics, Ukraine and Georgia, moving closer to NATO membership.

"In a few years, as I am sure, Ukraine will become a member of NATO, but this is not bound to create problems for our relations with Russia. According to the constitution, there will be no foreign bases in the territory of Ukraine, and for this reason no threats will come from the Ukrainian territory to Russia. In this connection, Russia will have no reasons for aiming its nuclear weapons at Ukraine," Ukraine foreign minister Vladimir Ogryzko told the Itar-Tass News Agency at a news conference in Tokyo.

Membership in the alliance for both Ukraine and Georgia will be discussed at the NATO summit in Bucharest April 2 to April 4.

The Russian government bonds due 2030 were spotted at 115.125 bid.

Elsewhere in South Africa, higher commodity prices have weakened the rand and are pushing up inflation projections, a market source said.

CPI inflation is expected to top out at 10% this month and post an average of 9% throughout the year. An average of 8.5% is expected in 2009, the source said.

The rand was seen trading at 8.049 to the dollar.

New bill to end double tax in Turkey

Turkey's "double taxation" on foreign investors may soon come to an end with the passage of a new bill, which will reform a trade law first passed in 1957, according to the Turkish Daily News.

The new reforms have been under consideration for five years and are intended to further combat unfair competition as well as update its financial reporting to E.U. standards, the report said.

The Turkish sovereign bonds due 2030 were quoted at 151.125 bid.

LatAm drifts on bland session

Latin American trading was generally "drifting" as the market was pained to begin trading in high gear after the long weekend, according to IDEAglobal's Alvarez.

Still, "there's a better sensation overall for the credit risk and mortgages" from the external markets, he said.

Acknowledging Merrill Lynch's downgrade and the ongoing saga of Bear Stearns, "there's not a lot of price drivers on the external side," he said.

Brazil's issues just slid along generally unchanged as the weakening of the real spurred talk of interest rate hikes among Brazilian monetary policy makers, a market source said.

"They're starting to look at it," Alvarez said about a rate hike.

The real recently sustained some damage with the release of February's balance of payments data as well as a projection that the deficit may reach $3 billion in March, the source said.

The real was spotted trading at 1.732 to the dollar.

The 11% Brazilian bonds due 2040 were quoted up by 0.15 point to 134 bid, 134.1 offered. The 7 1/8% bonds due 2037 added 0.2 to 108.3 bid, 108.6 offered.

Also in Latin America, Venezuela's 9¼% government bonds due 2027 lost 0.25 point to 96.5 bid, 97.25 offered.

Farmer lockout takes toll

In Argentina, the 12-day-old lockout of farmers has disrupted the supply chain of basic consumer goods and food products, reports the Buenos Aires Herald.

Supermarkets and consumers are beginning to feel the effects as well as those who have been caught in front of blockades the farmers have places on the country's highways.

The unrest began over the government's new "sliding scale" for taxes on exported goods, the report said.

"That's actually pretty severe stuff," Alvarez said.

"It could lead to a lot of extra expenditures" on the part of the government, he said.

The 8.28% Argentine discount bonds due 2033 were lower by 0.25 point to 86.75 bid, 87.75 offered.

Quiet Asia ends well

"It's relatively quiet," a trader said, although, "we closed on a firm note."

The trend should continue "barring any news we don't expect," he said.

In the Philippines, the government will suspend auctions for short-term debt for the next three months, the bureau of treasury said, according to the Manila Times.

The government will still offer its 364-day Treasury bills during that time.

The suspension comes as banks have demanded higher yields over recent weeks, the report said.

The report also cites a trader who believes the suspension will damage all involved.

The move will only make lending "more challenging" for banks, the trader said.

"Philippine cash was definitely firm overnight" but not as a result of the cancellation of the auctions, he said.

The Philippine five-year CDS was "a couple [bps] tighter" to 228 bps, he said.

The Philippine sovereigns due 2030 were spotted at 131 bid.

In Indonesia, increased demand from the government's new ban on foreign companies shipping goods between Indonesian ports has caused domestic shipping firms to apply for more loans, according to the Jakarta Post.

In 2007, the central bank loaned 9.8 trillion rupiah to shipping interests, compared to its more than 1 quadrillion rupiah in total loans.

Still, that figure was up by 88% from the 5.2 trillion rupiah the shipping sector borrowed in 2006, the report said.

The Indonesian government bonds due 2018 were quoted at 105.25 bid.

In Pakistan, new prime minister Yusuf Raza Gillani of the Pakistan People's Party (PPP) was sworn in by president Pervez Musharraf on Tuesday.

Gillani's coalition government is generally opposed to Musharraf's administration.

The Pakistani bonds due 2017 were seen at 86 bid, 88 offered.

In China, those with access to the internet may now read the stories published on the BBC News web site in full, according to the BBC.

"Dubbed the great firewall of China, the communist government routinely blocks foreign news sites such as the BBC," the report said.

Government censors have never acknowledged the redactions and have not officially announced any policy updates.

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