Emerging markets quiet, flat; Externals tamp risk; UAC, SK Energy to offer paper

By Aaron Hochman-Zimmerman

New York, June 9 - Emerging markets had a slow and flat day of watching and waiting as externals forced risk off the table.

"The news in general is all pretty negative," a syndicate desk official said, although the market held fairly stable on Monday.

Although it was expected, Lehman Brothers' need for $6 billion caused heartburn for investors.

"I'm still wincing over the whole Bear Stearns debacle," the syndicate official said.

Oil prices, which have been a major market driver, remained high, but dropped more than $4 per barrel on one of the few positive headlines of the session.

"Apparently the Saudi oil minister said that the increase isn't justified," the syndicate official said about Saudi Arabia's oil minister Ali al-Naimi.

"He's alluding to the speculators" artificially driving up prices, he said.

Also, equities were mixed on Monday, which left volatility lower by 0.44 at 23.12, according to the VIX index. The index is a commonly used gauge of market volatility.

A weak day for Treasuries allowed emerging markets to narrow by 4 basis points to a spread a 251 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to keep assets in emerging markets debt.

'Not much on the floor' in LatAm

"I don't see much on the floor," a strategist said. "It continues to be quiet."

Between trouble at Lehman Brothers and the continued high prices of oil "I thought that things were going to be worse today," a syndicate official said.

In Argentina, bonds were slightly better on Monday despite concerns that food supplies may be on their last days if farmers and truckers continue walk outs and demonstrations over higher export taxes.

The 8.28% Argentine discount bonds due 2033 were better by 0.5 point at 83 bid, 83.5 offered.

In Ecuador over the weekend, president Rafael Correa announced that a preliminary report from the committee auditing external debt indicates that there may have been irregularities in the contracting of certain debt.

Still, the irregularities may not lead to default, a market source said.

Correa has plans for upcoming infrastructure improvement and may want to stay in the good graces of the larger financial community, the source said.

The full report from the auditing committee will be available in 45 days, the source said.

The Ecuadorian 8% sovereign bonds due 2030 were lower by 1 point at 99.75 bid, 100.75 offered.

Also in Brazil, rumors of another acquisition by Companhia Vale do Rio Doce (CVRD) spooked the Bovespa, a syndicate source said, but the index held flat on the day.

The 7 1/8% Brazilian bonds due 2037 were quoted at 113.25 bid, while the highly traded 11% bonds due 2040 were seen at 134.7 bid.

Chavez to FARC: 'Release everyone'

Venezuela president Hugo Chavez asked the FARC rebel group in Colombia to release its hostages and end hostilities with the Bogota government.

"The time has come for the FARC to release everyone," he said.

Bogota was happy to hear the comments from Chavez, who in the past has been accused of aiding the leftist FARC.

Hostilities were last at their height in the days after March 1 when the Colombian army pursued and fired upon FARC rebels inside the borders of Ecuador, killing Raul Reyes, a senior leader. Venezuela strongly criticized Colombia for the assault, and the armed forces of Colombia, Venezuela and Ecuador were all mobilized as diplomats traded barbs.

However, the tone from Caracas is now distinctly different: "At this point in time, an armed guerrilla movement is out of place," Chavez said.

"He's got his hands caught in the cookie jar," a syndicate desk official said about Chavez.

Members of the Venezuelan national guard were caught on the Colombian side of the border with 40,000 rounds of AK-47 assault rifle ammunition destined for the FARC, he said.

"What are you going to do with 40,000 rounds of ammunition?" he asked.

"So last night he made an announcement saying: Look it's over ... he told them to disarm."

The statement from Chavez is "a complete about face from what he's been saying for the last couple years," but "it's just rhetoric," the official said.

The 9¼% Venezuelan bonds due 2027 were better by 0.5 point at 93.5 bid, 94 offered.

The 7 3/8% Colombian bonds due 2017 were spotted at 112.3 bid.

Market waits for Asia

"It's dead; there's nothing happening," a trader said about Asian credit, but with many Asian markets closed for holidays, the market was curious to know how the Asian reaction to recent headline shocks including the nonfarm payrolls in the United States, hawkish comments from European Central Bank chief Claude Trichet, Lehman Brothers' bid to raise $6 billion and the now tempered $11 spike in oil on Friday.

"I think it was evident that flows were light in LatAm, but they were even lower in Asia," the trader said.

The volatile market traded with light flows and "the tone remains very cautious," he said.

In the Philippines, the central bank issued a statement that the peso would recover by the end of the year, according to the Manila Times.

However, the development and budget coordinating committee only offered a wide forecast for the peso's performance.

The peso may end the year between PHP 42 and PHP 45 to the dollar, the committee said.

Central bank governor Armando Tetangco said inflation may hit a record 11% in June before dropping in July.

And "analysts see the peso recovering in the fourth quarter," he said, according to the Manila Times.

The peso is trading at 44.52 to the dollar after the 25 bps rate hike last Thursday.

The Philippine sovereign bonds due 2030 were spotted at 130 bid.

Also, Indonesia and India will meet in August to conclude negotiations on an economic partnership, said Indonesia's ambassador to India, Andi Ghalib, according to the Jakarta Post.

The framework of the agreement is already in place, Andi said, which includes reductions in taxes on trade and investment.

The two also agreed to the direct shipping of goods, rather than through an intermediary such as Singapore.

In investments, India's Tata Group and the Indian division of ArcelorMittal have expressed interest in buying stakes in the Indonesian state-run steel firm PT Krakatau Steel.

The Indonesian bonds due 2017 were quoted at 99.75 bid.

Elsewhere in Asia, Pakistan president Pervez Musharraf said over the weekend that he will not resign.

"I am not tendering resignation now," he said on Pakistani television.

However, Musharraf indicated that if the presidency is made into a mostly ceremonial position by leaders in the parliament, he may reconsider his future.

The Pakistani government bonds due 2017 were seen unchanged at 76 bid.

UAC, SK Energy bringing deals

In the tempered primary, Russia's OJSC United Aircraft Corp. (UAC) announced it will offer at least $100 million in bonds with an 18-month to two-year maturity.

MDM Bank will run the deal, which has been talked between 10¼% and 10½%.

The issue is expected in the second half of June.

Proceeds will be used to modernize the company's manufacturing facilities.

UAC is a government-run Moscow-based aerospace and defense firm.

Also, South Korea's SK Energy Co. (Baa2/BBB/BBB) will hold a roadshow for a five-year offering of dollar-denominated bonds.

Citigroup, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS will act as bookrunners for the deal.

The roadshow will be held in London and Singapore on Tuesday and in Hong Kong on Wednesday.

SK Energy is a Seoul-based energy firm.

Emerging Europe sits by

Emerging Europe sat quietly on Monday as investors dealt with "a lull in the market," a strategist said, referring to renewed distress from the financial sector provided by Lehman Brothers.

There is no specific event the market is waiting for, "it's very much wait and see," he said.

"It's going to take them some time to reset themselves," he said.

In Russia, the central bank announced it will hike its refinancing rate by 25 bps on Tuesday to 10.75%, according to the RIA Novosti News Agency.

Other rates are also expected to see a 25 bps hike, including the rates for loans secured by promissory notes and asset-backed loan rates.

Also, former deputy prime minister Viktor Zubkov said a new raw materials and commodity exchange will be opened in St. Petersburg in either July or August.

The exchange is expected to see 1.5 trillion rubles or $63 billion by the end of the year, he said.

The Russian sovereign bonds due 2030 were seen at 113.75.

In corporates, current prime minister Vladimir Putin said that it is reasonable to assume that Vnesheconombank (VEB) will be able to grow its credit portfolio to 850 billion rubles from about 200 billion rubles now by 2012, the Itar-Tass News Agency reported.

Putin, who chairs the bank's supervisory board, said: "Performance indicators are quite good. Last year the bank provided 56.4 billion rubles worth of credits and launched 39 investment projects."

Meanwhile, the Russian foreign ministry said that any further peace talks with Georgia depend on the government in Tbilisi, according to RIA Novosti.

Talks were suspended in July 2006 after Georgian troops were sent into Abkhazia, which broke with Georgia in the wake of the fall of the Soviet Union.

Georgian troops now overlook Abkhazia from the Kodori Gorge.

Politics, inflation drag on Turkey

Turkey's bonds traded lower again on Monday as headlines pushed traders away from the country, its credit and currency.

Recent political and inflationary issues have also scared away foreign investors, the Turkish Daily News reported.

Many companies have preferred to gamble on the return on risk in the Middle East, Russia and some E.U. countries.

Jan de Kreij, chief executive officer of the United Arab Emirates' Majid Al Futtaim Properties, said his company has ceased further investment in Turkey.

"It is commonly said that this year is a lost year and that the current stagnation might continue until 2010," said professor Vefa Tarhan from Loyola University Chicago in the report.

The lira was seen trading at 1.242 to the dollar.

The Turkish government bonds due 2030 were spotted at 148.8 bid.

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