Emerging markets nudged weaker; Strike ends in Argentina; Russian Agricultural talks two-tranche issue

By Aaron Hochman-Zimmerman

New York, May 20 - Emerging markets stepped back on Tuesday as equities sank on new oil price records.

Venezuela was the day's trading leader, although it has at times been unable to fully exploit the rising cost of its major export.

The Venezuela sovereigns due 2027 were better by 1 point.

In most sectors trading was flat to weaker.

"It's not doing too well; spreads have widened due to price action in U.S. Treasuries," a strategist said.

Still, considering what happened to equities, the session could have been worse, a trader said, adding: "We could very easily see the tone of the day continuing through the week."

Volumes will likely begin to drop off as the market nears a bank holiday on Monday in both the United States and United Kingdom.

In the primary, investors looked ahead to anticipated issues from OJSC Russian Agricultural Bank and China's Noble Group to reignite the primary fires.

Both are expected to perform reasonably well, sources said.

With an early drop in equities, volatility was higher throughout the session to end higher by 0.57 at 17.58, according to the VIX index. The index is a frequently used gauge of market volatility.

LatAm stretches with equities

Spreads widened in Latin America thanks to Treasury action and flailing U.S. equities, while in Colombia economic indicators did not point to a healthy economy in March, a market source said.

Industrial production contracted by 9.43% compared to an expectation of 5.4% growth.

Still, Colombia's long-term picture looks strong, the source said.

High commodity prices and increased trade with Venezuela have left the country in a good position, but along with growth, high commodity prices may spark further inflation, the source said.

The government may soon begin to consider adjustments to lending rates, the source added.

The peso was seen trading at 1,787 to the dollar.

The 7 3/8% Colombian government bonds due 2017 were quoted at 113.25 bid, 113.75 offered.

In Venezuela, the national oil firm PDVSA plans to take a $3.5 billion loan from the Japanese Bank for International Cooperation, which will be paid back in oil, a market source said.

PDVSA's 2007 earnings improved 15% year over year, but the company's growing pile of debt is concerning, a market source said.

PDVSA added on $13 billion in new debt in 2007 making the total $16 billion, the source said.

Even with record setting oil prices the company has only been able to halt a decline in production, which leaves it susceptible to volatility in the market, the source said.

Light sweet crude was seen trading as high as $129.6 per barrel on Tuesday.

The 9¼% Venezuelan bonds were seen up by 1 point at 91 bid, 91.5 offered.

In Brazil, the weekly FIPE-CPI hit 0.89%, which was 0.15% higher than expectations, a market source said.

Food prices were the major inflation driver, but health care and clothing costs factored in as well, the source said, adding that industrial inflation will continue to push consumer inflation higher.

The real was seen trading at 1.651 to the dollar.

The 7 1/8% Brazilian bonds due 2037 were lower by just 0.1 point at 114.7 bid, 115 offered.

Farm strike over

In Argentina, leaders of the striking farmers agreed to end the strike, but bond prices seemed to anticipate the reconciliation, a strategist said.

The farmers will work, but will look forward to Thursday, when leaders will speak with president Cristina Kirchner.

Some of the local newspapers have reported that Kirchner has discussed a number of reforms including new housing projects, tax reduction for small and medium companies, and former economy minister Martin Lousteau's debt swap program, but a source is skeptical and intends to remain on the sidelines until the credits takes a clear direction.

The 8.28% Argentine discount bonds due 2033 were seen unchanged at 83 bid, 84 offered.

Russian Agricultural talks

The primary market held off during the big equity drop on Tuesday, but Russian Agricultural Bank (A3/BBB+) issued talk of 7 1/8 to 7¼% for its five-year bonds and 7¾% to 8% for its 10-year bonds, according to a market source.

No amount has been set for either dollar-denominated issue.

ABN Amro, Citigroup and Goldman Sachs will act as bookrunners for the deal.

The Russian Agricultural Bank is a government-owned Moscow-based lender focused on the agriculture sector.

The name has been historically well-received, a market source said.

But another source pointed out that the talk only underscores how squeezed the yields of the banks notes due 2017 are at 713 bps bid, 702 bps offered.

Still, as an entirely state-owned entity, the issue will be included in JPMorgan's EMBI index, which will give it good support, the source said.

In Latin America, Banco Nacional de Desenvolvimento Economico e Social (Bndes) (Baa2/BBB-) announced a benchmark-sized 10-year senior unsecured offering.

Morgan Stanley and Citigroup will act as bookrunners for the deal.

On June 16, the proceeds from the notes will be used to buy back and exchange the new notes for the Bndes notes sold in 1998.

The bonds will be in default if government ownership falls below 50%.

Bndes is a Rio de Janeiro-based government-run development bank.

Also in the primary, the United States' Textron Financial Corp. (A3/A-/A-) announced it will offer Mexican peso-denominated medium-term notes.

Merrill Lynch will act as bookrunner for the deal.

Proceeds will be used to refinance debt, which as of April 30 had a weighted average yield of 3.15% and a weighted average maturity of 14.2 days.

Textron is Providence, R.I.-based commercial finance company.

Asia could be worse

After the quiet of Monday, "we saw stuff widen on U.S. equities selling off," a trader said.

"It was weak but not as weak as one might have expected," he said.

In the Philippines, the government ran a surplus of PHP 25.8 billion in April, compared to a PHP 12 billion surplus during April 2007, the Manila Times reported.

That halved the deficit for 2008, which now stands at PHP 25.8 billion.

"The April surplus is the highest on record for the month, ever since 1986," finance secretary Margarito Teves said in the report.

The government is expecting a surplus of PHP 19.2 billion in the second quarter.

The Philippine bonds due 2030 improved by 0.25 point to 131.25 bid, 131.75 offered.

Meanwhile, Indonesia's bonds due 2017 fell 0.5 to 101.75 bid, 102.25 offered.

Peace talks resume

Diplomats from Pakistan and India met in Islamabad to resume talks for the first time since the new civilian government is in place in Pakistan, the BBC reported.

Still on Monday, an Indian soldier was killed in the border region, but Pakistan denies involvement in the incident.

Intermittent talks have continued for four years without resolution of major issues such as the rights to the Kashmir region.

Volumes up, but flat in Emerging Europe

Volumes improved on Tuesday in emerging Europe, although spreads and prices were slightly weaker.

Still in Russia, thanks to high commodity prices and a business-friendly government, the new issues from VTB Bank and Evraz Group SA continue to perform well overall, a market source said.

Also, the offices of the United Kingdom's BP were raided by Russian security forces for the second time in two months, according to the BBC.

The reason for the raid may surround BP's involvement with Russia's OAO Gazprom, the report said.

The Russian government has recently taken steps to increase its control over its energy assets.

Elsewhere in Russia, prime minister Vladimir Putin plans to approve a plan to spend 13 trillion rubles on Russian transportation infrastructure between 2010 and 2015, the Itar-Tass News Agency reported.

The federal government is expected to contribute 4.7 trillion of the total investment.

"I have in mind the most ambitious of all investment programs, ever adopted by the Russian government," Putin said.

The project will include money predominantly for roads, air and seaports.

The Russian government bonds due 2030 added just 0.05 point to 115.7 bid, 115.8 offered.

In Georgia, 72 election observers from the Commonwealth of Independent States will monitor Wednesday's parliamentary elections, according to Itar-Tass.

Other organizations including NATO and the Organization for Security and Cooperation in Europe will send delegations to Georgia.

Elsewhere in emerging Europe, Bulgaria's steel and scrap metal firm Kremikovtzi AD will be given €30 million in emergency financing from Luxembourg's ArcelorMittal.

The funds will be used to pay salaries, immediate environmental capital expenditures and for the purchase of new raw materials, consumables and spares, according to an ArcelorMittal press release.

Moody's downgraded Kremikovtzi after it was unable to make an interest payment under its €325 million notes.

Turkey lags emerging Europe

Turkey may be the one place in emerging Europe where economic growth cannot fully counteract inflation, a market source said.

The country's outlook is damaged by both commodity prices and political risk, the source said, perhaps making it the one country in emerging Europe not suited to a long position.

The lira was seen trading at 1.239 to the dollar.

Meanwhile in Turkey, the European Bank for Reconstruction and Development (EBRD) will decide whether or not to offer full membership to Turkey in October, according to the Turkish Daily News.

The London-based bank was established after the Cold War to assist the growing economies in the former Warsaw Pact nations.

However, the European Union has filled that roll, "thus they no longer need EBRD credits," said Gazi Ercel, a former governor of Turkey's central bank.

In order to survive, the bank must issue credit somewhere and the United States pressed for Turkey, Ercel said.

The creation of an EBRD branch in Ankara would be "an important step in joining the E.U.," the Anatolia news agency reported.

The Turkish government bonds due 2030 slipped 0.5 point to 153 bid, 153.5 offered as its five-year CDS tightened 1 bp to 230 bps.

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