Emerging markets flat to lower; troops mobilize around Colombia; primary out of office

By Aaron Hochman-Zimmerman

New York, March 3 - Emerging markets had a quiet and uneventful day everywhere but Colombia, where troops from Ecuador and Venezuela were mobilized along its borders.

Trading volumes were light, but the three militarized countries in Latin America all led the way down as each dropped about 1.5 points from their respective benchmark issues.

"It's a quiet day, mostly unchanged to wider," a trader said.

Externally, HSBC took the day's beating from the housing market to the tune of $17 billion but still saw annual profits better by 10% at $24 billion.

"We think it gets worse," a portfolio manager said about the market in general.

Many investors are looking at currencies in order to capitalize on the weakness of the dollar.

The dollar was at an eight- to 10-year low against many Latin American and Asian currencies, a market source said.

Volatility spiked early, but trailed off in the afternoon to end lower by 0.26 at 26.28, according to the VIX index. The index is a standard measure of market volatility.

As Treasuries were falling, emerging markets was widening by 5 basis points to a spread of 294 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to keep money in emerging markets debt.

Venezuela, Ecuador encircle Colombia

The armed forces of Ecuador and Venezuela mobilized along the border with Colombia, after the Colombian army killed a FARC rebel leader on Saturday inside the border of Ecuador.

Colombian diplomats have been removed from both countries.

Colombia issued apologies to Ecuador for entering its territory but claimed its forces were already in pursuit of Raul Reyes after taking fire from the FARC inside Colombia.

Ecuador denies the claim.

Colombia, with its allies in the United States, possesses the largest military in the region, but would face a difficult war on two fronts, as well as an internal enemy in the FARC if hostilities bubbled over, a market source said.

"The market still doesn't believe its going to escalate into a major outright war," a strategist said.

Still, investors are concerned, and some spreads have been pulled wider as a result, he said.

"It's all a big dog and pony show," a trader said.

Although, there are rumors circulating that evidence may surface which implicates Venezuela for the contribution of millions of dollars to terrorist groups, the trader said.

If the United States acts to prevent trade with Venezuela, that could seriously affect the Venezuelan economy, he said.

However, the United States needs oil as well, he added.

"It is kind of mixed out there," a buyside source said about the range of predictions regarding a possible escalation of hostilities.

Although, "there's too much to lose on each side if this escalates," the buysider said.

The 9¼% Venezuelan bonds due 2027 sank by 1.6 points to 96.9 bid, 97.75 offered.

The 8 1/8% Colombian bonds due 2024 were quoted lower by 1.5 points at 113.5 bid, 114.35 offered. The 7 3/8% bonds due 2017 were quoted lower by 0.25 point at 109.125 bid, 109.75 offered.

The 8% Ecuadorian bonds due 2030 were down 1.5 points at 96.5 bid, 97 offered.

LatAm weakens on light volume

A quiet day in Latin American trading saw the weight of equities hanging on bond prices.

In Brazil, like in many sectors, the currency trade was on the minds of investors.

"We see lots of demand in Brazil reais," a portfolio manager said.

The reai was seen trading at 2.55 to the dollar.

"[Warren] Buffett came out with those comments," a strategist said, indicating that the heightened interest was due to copy-cat investing.

The Brazilian 7 1/8% government bonds due 2037 were spotted at 107.8 bid, 108.1 offered.

Argentina's 8.28% discount bonds due 2033 were lower by just 0.1 point at 88 bid, 88.5 offered.

Also, the government of Venezuela is likely planning another $1 billion of issuance in 2008, said finance minister Rafael Isea, according to a market source.

The yearly financial strategy called for the issuance of $1.5 billion, but $450 million in debt was recently issued to local markets, the source said.

No further details were offered about upcoming issues.

Putin's man Medvedev wins

In what promises to be the least surprising election of 2008, outgoing president of Russia Vladimir Putin's chosen successor, first deputy prime minister Dmitry Medvedev, won a landslide victory in Sunday's elections.

Many Western leaders have acknowledged the Kremlin's efforts to limit opposition but still congratulated Medvedev. Some called for renewed relations with the Russian government.

Poland prime minister Donald Tusk called on the European Union to work openly with Russia, according to the Itar-Tass News Agency.

Despite the "irregularities" that were widely reported before the election, the results reflect a strong popular mandate for Medvedev, a BBC analyst said.

The Russian sovereign bonds due 2030 added 0.15 point to 114.65 bid, 114.9 offered.

Poor showing in emerging Europe

"Everything looks bad," a portfolio manager said of emerging Europe bond activity.

"We wouldn't buy anything at all," he added.

Volumes were light and prices receded as equities waffled and the dollar dumped.

In Ukraine, Russia's OAO Gazprom reduced the flow of gas by 35%, according to the Kiev government.

Gazprom claims it cut supplies by only 25% over an unpaid debt of $1.5 billion.

Gazprom also assured its customers in Western Europe that its dispute with Ukraine will not affect shipments to other parts of the continent.

Also, president Viktor Yushchenko met with prime minister Yulia Timoshenko to resolve conflicts over the country's budget, according to the president's official web site. Yushchenko would like to see more action taken by the government to deal with the gas crisis as well as keeping inflation under 9.6% in 2008.

The hryvnia was seen trading at 5.05 to the dollar.

The Ukrainian government bonds due 2016 were spotted at 98.85 bid, 99.35 offered.

In Turkey, after the return of the Turkish army from Northern Iraq, prime minister Recep Tayyip Erdogan asked that rebels of the Kurdistan Worker's Party (PKK) to work through differences with the Ankara government democratically.

The Turkish sovereign bonds due 2030 dipped 0.15 point to be quoted at 151.3 bid, 151.6 offered.

Elsewhere, Serbia reclaimed control over a 30-mile stretch of railroad track in Kosovo.

The Belgrade government still refuses to recognize Kosovo's independence.

Asia holds in quiet session

Asian credit sat through a quiet day as prices were mostly unchanged.

The benchmarks gained slightly on the light volumes.

In the Philippines, the government rejected Monday's high interest rate auction bids for its short-term bonds, according the Manila Times.

PHP 1.5 billion in 91-day Treasury bills were up for auction, but banks only showed interest in PHP 510 million.

Despite the auction results, the government said it is not worried about financing.

The treasury will draw from a $300 million loan program from the Asian Development Bank, the report said.

The Philippine government bonds due 2030 were better by 0.5 point and were quoted at 130.25 bid, 130.75 offered.

In Indonesia, the state-run mortgage firm PT Sarana Multigriya Finansial (SMF) plans to issue a 200 billion rupiah bond in April as well as another 200 billion rupiah bond in October, reported the Jakarta Post.

The Indonesian sovereigns due 2018 gained 0.25 point to 104.5 bid, 105.25 offered.

Pakistan's government bonds due 2017 held flat at 86 bid, 87 offered.

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