Emerging markets stumble; Argentina digs deeper; Gazprom, Georgia light up primary

By Aaron Hochman-Zimmerman

New York, March 28 - Emerging markets traded lower on poor market sentiment brought on by data from the major markets.

In trading, Argentina continued its downward spiral, losing only 0.15 point but finding new lows for the quarter at 84 bid for its discount bonds due 2033.

Otherwise, "the market's pretty quiet," a syndicate desk official said about trading.

"It's amazing how stable things have been," an emerging markets strategist said about emerging markets in general, even as "investors are realizing that the situation is only going to deteriorate for the developed markets."

"So why pay so much more for emerging market debt?" he asked.

"There was some hope it would narrow," he said about the gap between spreads in emerging and major markets, but investors will have to wait, he added.

However, the primary was put in gear as Russia's OAO Gazprom burst through the monotony on the corporate side with a $2 billion offering, which will be on the road Monday through Wednesday.

Georgia also announced a $500 million offering.

Meanwhile, over the first quarter of 2008 emerging market bond funds have fractured into two distinct groups, with local currency funds outperforming the major currency funds, according to EPFR Global.

"There are a few bullish signs buried in the first quarter of 2008 flow data. Investors remain willing to buy into markets and regions that they see as either under-bought last year or oversold this year," said EPFR Global senior analyst Cameron Brandt in a press release.

"Taiwan, Russia, Africa and the Middle East and financial plays fall into this category," he said in the release.

During Friday's session, after receding significantly in the middle of the day, volatility inched back to end lower by just 0.17 at 25.71, according to the VIX index. The index is a commonly used gauge of market volatility.

Treasuries made up ground as emerging markets widened by 8 basis points to a spread of 304 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will require to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was also wider by 8 bps with a spread of 329 bps.

The diversified index has a less-strict liquidity rule for inclusion.

Emerging Europe ends week lower

Prices in emerging Europe were pushed back even as primary issuers were confident enough to step onto the field with dollar-denominated issues.

In Russia, proposals to grow the Russian economy through 2020 are expected at the economic ministry from various other ministries and departments before April 1, the RIA Novosti News Agency reported.

Deputy economics minister Anna Popov said plans should focus on the protection of legal rights, the development of corporate management, an environment of competitiveness and efficiency, but noted that corruption remains a large hindrance to implementation.

The Russian government bonds due 2030 added 0.25 point to 115.25 bid.

In Ukraine, president Viktor Yushchenko announced that the national oil company Naftogaz Ukrainy is near bankruptcy.

"We have never been so close to bankruptcy of Naftogaz Ukrainy as we are at present," he told the Itar-Tass News Agency, although the company's profits rose 46% to 3 billion hryvna in 2007, as compared to 2006.

The company's operations provide 97% of the gas and oil used in Ukraine, the report said.

The Ukraine sovereign bonds due 2016 fell 0.75 point to 98.25 bid, 98.75 offered.

Also in the Commonwealth of Independent States, Kazakhstan has felt the brunt of the damage in the financial markets compared to the other former Soviet republics, according to a market source.

Still, its vast natural resources and ongoing investment projects offer it a bright future, the source said.

The government and monetary authorities have, in the past, been able to learn from mistakes, the source said.

In the short term, it is likely that the tenge will begin to appreciate in order to cover near-term balance-of-payment issues, the source said.

The tenge was seen trading at 120.12 to the dollar.

In Turkey, the constitutional court president, Hasim Kilic, asked for cooperation from both sides of the case brought against the ruling Justice and Development Party (AKP), according to the Turkish Daily News.

"I underline that fulfilling obligations to live together is a common task on everyone's shoulders, from individuals to state institutions, from government to opposition," Kilic said in the report.

The court is expected to hear arguments from prosecutor general Abdurrahman Yalcinkaya, who accuses the AKP of governing in an unconstitutional and anti-secular manner.

The Turkish sovereigns due 2030 sank 1.875 points to 148.25 bid.

Gazprom offers $2 billion, Georgia $500 million

With the help of issues from emerging Europe the primary has been shocked back to life.

New paper has been offered from Gazprom and Georgia, warrants were auctioned in Mexico, and Thursday $100 million was priced by the Bahamas.

On Friday, OAO Gazprom (A3/BBB/BBB-) announced it is planning to hold a roadshow for an upcoming $2 billion bond offering.

Citigroup and Morgan Stanley have been mandated to act as bookrunners for the deal.

The roadshow will be held from Monday to Wednesday.

Gazprom is a Moscow-based government-run oil producer.

"Gazprom needs the money," a strategist said.

"They obviously don't care if it drives yields wider on the corporate curve in Russia," he said.

"It just takes one placement like that to alter the reality ... and then of course everything will have to be priced accordingly.

Also, the Republic of Georgia (B+/BB-) has mandated JPMorgan and UBS for its proposed $500 million deal.

The United Mexican States announced a total sale of $1.25 billion during its auction of 1 million series XWA08 debt exchange warrants and 250,000 series XWB08 debt exchange warrants in order to trade a series of 21 "Old Bonds" for five newer exchange securities, according to a market source.

The warrants will be exercisable for the exchange securities on Oct. 9. The government may elect to postpone the exercise date until Oct. 24.

If the MBonos securities, which have different minimum values assigned, are below their limit on the exchange date, the warrants will be voided.

The Udibonos securities will be exercised at the applicable dollar-peso or euro-peso exchange rates on Oct. 7.

Barclays and Merrill Lynch were asked to act as bookrunners for the deal.

"You really don't know until October when they get exercised," a syndicate official said about the relative success of the warrant auction.

Local currency offers come in from Asia

In local currencies, Singapore's Swiber Holdings Ltd. priced S$100 million three-year bonds in two tranches, according to a press release.

Swiber priced a S$50 million fixed-rate tranche and a S$50 million floating-rate tranche with a combined interest rate of about 4%, the release said.

OSCB acted as the bookrunner for the deal.

Swiber is a Singapore-based gas and oil services provider.

Malaysia's Matang Highway Sdn. Bhd. (AA, local) announced plans to offer a 70 million ringgit sukuk.

Proceeds will be used to refinance debt issued by AmInvestment Bank Bhd. for the construction of a highway between Kuching and the government complex near Matang and for working capital.

The issuer is a government entity established to fund the construction of the highway.

LatAm held back by U.S. data

Latin American trading was hurt by negative data from the United States, a syndicate official said, although prices showed little movement.

"The JC Penney numbers came out and they were very, very weak," he said about the U.S. clothing retailer, which lowered its expected first-quarter earnings to $0.50 per share from $0.75 to $0.80 per share.

"It just trickled down from there ... consumer confidence is at its lowest levels since '93," he said.

Venezuela's 9¼% government bonds due 2027 were better by 0.5 point to 95.65 bid.

Brazil's 11% bonds due 2040 were down just 0.05 point to 133.7 bid.

"It's really just data" affecting the market, he said.

Both sides spurn talks in Argentina

In Argentina¸ the government and striking farmers continued to battle over export tax hikes on agriculture products, which have sparked protest demonstrations and left some supermarket shelves empty.

President Cristina Kirchner, who is known to be a stubborn negotiator, said she would not sit down to talks "with a gun to her head" but insisted that strikes end before talks begin.

The Buenos Aires Herald reported that leaders of the farmers discussed a 48-hour suspension of the strike, but no decisions were reached.

A market source said that the government's mishandling of the situation is evidence of the larger policy failures of the administration.

The source suggested investors cover or add to long positions as well as avoid short-term credits.

The 8.28% Argentine discount bonds 2033 dipped another 0.15 point to 84 bid.

Asia prices weaken

After a stagnant session Thursday, Asian issues ended the week by sliding lower.

In the Philippines, mounting inflation is likely to continue as oil and food prices rise, the central bank said Thursday, according to the Manila Times.

Although, inflation rates may ease in the second half of the year, the report said.

The bank set an inflation target of 3% to 5% in 2008 and 2.5% to 4.5% in 2009.

The peso was seen trading at 41.899 to the dollar after a close at 41.840 on Thursday.

Light sweet crude was seen lower at $104.95 per barrel.

The Philippine government bonds due 2030 dropped 1.25 point to 130.625 bid.

Meanwhile in Indonesia, the purchase of a 56% stake in Bank Internasional Indonesia (BII) by Malaysia's Malaysian Banking Bhd. (MayBank) will come at a "reasonable" $1.5 billion, said Henri Ho, BII's president director, according to the Jakarta Post.

MayBank has also offered Singapore's Temasek Holdings $1.2 billion for the remaining 44% of BII.

The Indonesian bonds due 2017 gave back just 0.125 point to 105.125 bid, 105.625 offered.

Also, the World Bank warned Pakistan that it must act to curb inflation and lower commodity prices or it will face a difficult situation, the BBC reported.

"This is not yet a crisis, but the economic picture for Pakistan is not good," said the bank's vice president, Praful Patel, in the report.

"Growth can only continue if Pakistan adjusts to the new global reality, which includes high prices for oil, commodities and foodstuffs such as wheat," he said.

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