Venezuela gains on rising oil price; Turkey seen lower in wake of headscarf ruling

By Paul Deckelman

New York, June 6 - The continued rebound in world crude oil prices to record levels Friday pushed Venezuela's sovereign bonds up for yet another session - but emerging markets debt in general was seen lower, with spreads mostly widening out as U.S. Treasury issues rose in response to worse-than-expected May unemployment data.

That helped to push the widely followed EMBI+ index compiled by J.P. Morgan Chase & Co. out to 255 basis points, an 11 bps widening on the session, and on the week itself, versus the 244 bps level at which the index had ended last Friday. The index measures the amount of extra yield that investors require in order to hold EM assets rather than the safer Treasuries.

While oil-rich Venezuela's bonds were up, benefiting from the two-day bounceback in oil prices, Argentina's bonds continued to give ground, amid continued unrest in that nation arising from a strike by the farmers, upset over government policies.

Unrest of another kind helped to push Turkey's bonds lower, with that country's public prosecutor taking aim at the ruling AK Party, which championed a law, overturned this week by the nation's highest court, that allows the wearing of a traditional Muslim headscarf by university women - legislation seen as an attack on the country's secularist constitution.

But while there were hotbeds of activity, in other markets, traders said the main focus seemed to be watching the behavior of U.S. and other equity markets, which fell in response to the U.S. employment data.

"It was a very quiet, dull morning session ahead of [the U.S. non-farm] payrolls" a European trader said, "and since then, well, it's been a very long week, with not a huge amount going on. So net-net, payrolls was a bit of a non-event."

He said "Treasuries are stronger while equities are weaker, but the fixed-income bond world [apart from Treasuries] is digesting. They haven't had any appreciable shift one way or the other."

Markets analyze U.S. jobless data

The Labor Department reported that the jobless rate jumped to 5.5% in May, well up from 5% the week before and well above analyst's consensus estimates. It was the highest jobless rate since October 2004, and seemed to confirm the fears of observers who see the world's largest economy sliding towards a recession, if it isn't already there.

The department also announced that non-farm payrolls - usually the headline statistic in the monthly release - shrank by 49,000 in May. While that figure was smaller than most analysts' expectations, it still marked the fifth consecutive month that the economy shed jobs.

That caused the equity markets to go into a tailspin, led by Wall Street, where the bellwether Dow Jones Industrial Average swooned by 394.64 points, or 3.13%, to close at 12,209.81. Other, broader market indexes followed suit.

At the same time, Treasuries rose smartly, with the yield on the benchmark 10-year issue, for instance, falling some 10 bps to 3.94%. The fall in equities - which are seen by some in the market as a proxy for generally riskier investments, including EM debt, and the concurrent fall in Treasury yields had the net impact of generally driving emerging markets spreads wider.

Muted reaction

However, the European trader took a more sanguine view of the latest numbers. "I think reading some of the reports between the lines, the sentiment is that the 5.5% figure has been somewhat overstated, and will creep back, to 5.4%, or 5.3%, or 5.2%, or whatever, in subsequent readings, and it was a little bit of an outlier.

"If you take that rate out of it, the rest of the data - the change in payrolls, the earnings, etc. - were pretty much in line. So net-net, this data may overall leave the taste that the hawkish stance by the Fed may ease a little bit."

He said that from where he sat, emerging Europe overall had not much reaction. "Where did the leave my market? Treasuries obviously were stronger, equities lower on the back. I really haven't moved any of my prices since before the data."

Friday, he said, "was the exhausted end to a very long week, that's what it feels like."

On the new-issue front, he said, now that Hungary and Czech Republic successfully brought their new deals at mid-week, there are "lots of names floating around in the ether but no news in the past day or two about confirmation, for sure. I guess we're going to get something next week, I would think."

Oil spike drives Venezuela debt higher

The U.S. jobless figures and their impact on equities competed for attention in the world financial markets Friday with the rebounding price of oil, which shot up for the second consecutive session. Crude prices jumped $10.75 or more than 9% on the session, touching a record intraday high of $139.12 a barrel, before settling in at $138.54. It's not only the highest-ever close, but the biggest one-day dollar-price gain on record. Over Thursday and Friday's sessions, black gold rose by more than $16 from its mid-week lows.

And for a second straight session, Venezuela's bonds, which had struggled earlier in the week amid market concerns about president Hugo Chavez' latest controversial efforts to increase the power of his government - he has proposed legislation commanding citizens to cooperate with his secret police and government officials, or face possible imprisonment - were up solidly.

The average spread on the country's dollar-denominated bonds was seen having tightened by as much as 14 bps before finally ending 8 bps tighter, at 579 bps over Treasuries. Venezuela's average spreads were the only ones among the 15 tracked by the EMBI+ to narrow on the day.

Venezuela's 10-year 5.75% global issue tightened by nearly 14 bps on the session to a yield of 9.60% and a price of 79.

With the nation's fortunes tied to the price of its chief export commodity, the bonds could continue to firm should oil prices continue to rise - and rise they will, according to Morgan Stanley, which said Friday that world oil prices could top $150 by July 4. The investment bank predicted that strong petroleum demand in Asia could triggers a slowdown in shipments of crude to the United States.

Oil has already risen 44% this year.

Brazil benchmark better; Argentine angst

Elsewhere in Latin America, Brazil's global bonds due 2040 were seen having risen nearly ¼ point on the session, breaking out of a three-day slump. However, most of the country's shorter debt was seen pretty much unchanged.

Argentina's bonds were seen having widened out by some 18 bps on the day to 544 bps, as the high-beta credit continues to be roiled by political uncertainly, with farmers continuing their nationwide protests against the trade policies of president Christina Kirchner, whose imposition of a 13% tariff hike on soybean exports was announced in March. That sparked the growers into action, and the strike has now dragged on for some 90 days.

The battle was joined this past week by the nation's truckers, angered at the possible losses they face from not being able to haul grains and other agricultural products to market. They parked their rigs on some 60 roads to protest what they call the farmers' "lockout" impeding grain and soybean exports.

Further depressing the bonds was a Barclays Capital report in which the investment bank lowered its previous projections for full-year gross domestic product this year and next year, citing the impact of the farm strikes, increased inflation and decreased foreign investment.

Mexico lower with peso

Mexico's local-currency bonds weakened as the peso fell in response to the bad economic news from that country's neighbor to the north, its biggest export customer and trading market. The yield on the benchmark 10% paper due 2024 pushed upward by some 7 bps to 8.46%, while the price was down nearly a full centavo to 113.64.

Asian market quiet

A New York-based trader in Asian issues said that "we're basically just watching what's going on in other markets as much as anything. The tone is weaker, just because of the volatility. But it's all happening on fairly thin volumes."

He saw spreads in his market "generically a good 5 to 10 [bps] wider, I'd say. The indices are a bit wider than that," with investment-grade EM debt about 7 bps wider from its overnight wides and high-yield emerging paper about 20 bps or more wider.

He saw the Philippine and Indonesian benchmark issues about 5 bps to 7 bps wider. He said that "there's really been not much going on in the cash markets. It's been CDS and indexes that have been trading."

Earlier in the trading day, the five-year credit-default swaps contract protecting holders of Philippine sovereign debt was quoted at 228 bps bid, 233 bps offered, while Indonesia's CDS costs were at 455 bps bid, 465 bps offered.

The Philippine cash bond due 2031 was being quoted at 111.375 bid, 111.625 offered, while its 2032 benchmarks were in the mid-96 range.

In Indian bonds, he said, spreads "are being quoted wider, but there's really very little trading. It's the same drill."

The trader projected that "over the weekend, people will probably start to think about what economies are going to be the hardest hit by the higher oil price, but at the moment, it's more of a risk-aversion rather than anything else that's going on."

Turkey paper widens along with crisis

Turkish government dollar-denominated bonds were seen having widened out by some 15 bps on the session a spread of about 310 bps.

Turkish local-currency bond yields were meantime up by an average 55 basis points to 20.79%. Meanwhile, stocks fell and the lira declined in value, as the markets continued to react to the latest political turmoil in the Eurasian nation, sparked by a controversial court ruling about the permissibility of wearing the traditional Islamic headscarf, the hajib, on college campuses.

Turkish law bans such displays as being incompatible with the country's secularist constitution, but a law allowing the scarf to be worn was pushed through Parliament by the ruling AK Party of prime minister Recep Tayyip Erdogan. However, on Thursday the nation's highest court overturned that law, declaring that it "contravened the principles of secularism"' in Turkey.

The nation's public prosecutor has laid out the case for banning the party and excluding 71 of its leaders from politics for five years for mixing Islam with the affairs of state.

The party meanwhile charges that the Constitutional Court overstepped its authority in overturning the new law.

Erdogan says that his big electoral victory last year gives him a popular mandate to ease official curbs on religion.

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