Inflation drags emerging markets; Rate hikes in Chile, India; Romania prices €750 million 10-year bonds

By Aaron Hochman-Zimmerman

New York, June 11 - Emerging markets sank for another day as U.S. headlines and global inflation took turns beating the sector.

"I'm just wondering where the top is for oil and where the bottom is for Lehman Brothers," a market source said.

Even U.S. Treasuries "are acting like [emerging markets]," a buyside source said.

No recovery is likely "as long as Treasuries are selling off 15 to 30 bps in one day," the buysider said.

"The real question is: Is there going to be another Bear?" a syndicate desk official said, adding that if the Federal Reserve is now as responsive as some expect investors should be "lapping up" Lehman Brothers shares.

In the battle against inflation, interest rates were up in Chile and India, with some expecting rate hikes from the European Central Bank and the Fed to follow.

In trading, Latin America dropped, but held its own against the onslaught of sour news.

Chile's bonds due 2013 added 0.5 point after its 50 bps rate hike.

In the primary, Romania priced €750 million of bonds, but it may be the last major-currency issue through the pipeline until conditions improve, the buysider said.

Another day of losses in equities lifted volatility by 0.94 to 24.12, according to the VIX index. The index is a common yardstick of market volatility.

As a sector, emerging markets widened by 4 basis points to a spread of 249 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to keep assets in emerging markets debt.

LatAm dodges headline bullets

Latin America traded lower on Wednesday, but not by as much as it could have.

"It's not really hitting LatAm," a syndicate desk official said.

Still, "almost everything is wider today," he said, as "a reaction to Treasuries."

Venezuela led the sector with modest gains.

The 9¼% bonds due 2027 were up 0.4 point to 96.15 bid.

Light sweet crude jumped by $5 per barrel, but the syndicate official was not convinced that was the reason for Venezuela's performance.

In Argentina, the conflict between the government and the farmers went on another day, but a new player stepped onto the stage.

The Supreme Court accepted a suit filed in the San Luis province to have the government's tax program for farm goods declared unconstitutional.

The 8.28% Argentine discount bonds due 2033 added 0.25 point to 82.625 bid.

Elsewhere, "inflation was on the high side in Brazil," a buyside source said.

The real was seen trading at 1.634 to the dollar.

The highly traded 11% bonds due 2040 were down 0.45 point to 133.45 bid, while the 7 1/8% bonds due 2037 sank 1.05 points to 114.55 bid, 114.8 offered.

Also in Mexico, inflation was a topic of concern.

"Mexico is now pricing in three rate hikes," the buysider said. "A week ago no one thought the central bank was even going to hike rates."

The peso was seen trading at 10.429 to the dollar.

The Mexican 5 5/8% bonds due 2017 were quoted at 102.55 bid, 102.7 offered.

Chilean peso falls on rate hike

In Chile, as a reaction to what is becoming a global inflation crisis, interest rates were pushed up 50 bps to 6.75% by the central bank.

Investors expected only a 25 bps hike, a market source said.

The hike was aimed at reducing inflation to less than 3%.

"May's inflation exceeded expectations substantially, due to new price increases for energy, and especially foodstuffs. Core inflation indicators and various measures for inflation expectations are up," the bank said in its statement.

The peso was seen trading at 490.75 to the dollar.

The reaction was negative, even though "they said it was already priced in," the syndicate official said.

"Some people would argue that was an overdue move," a buysider said.

The Chilean bonds due 2013 were better by 0.5 point to 102.85 bid.

Asia buried in inflation

"Inflation, inflation, inflation," a trader repeated, "it's a global scare right now."

India made an effort to put a lid on inflation as the central bank raised interest rates 25 bps to 8% Wednesday.

The rupee was seen trading at 42.7 to the dollar.

"Tone is poor ... EM sovereigns, I feel, are very vulnerable to inflation-led selling," he said.

The market saw pressure on Vietnam, Indonesia and the Philippines, he said, "it just pretty much felt weak across the board."

In the Philippines, the stock exchange posted outflows of foreign investment for the first five months of 2008, according to the Manila Times.

The PHP 18.8 billion exit from the market turned around a trend of PHP 46.5 billion inflows during 2007.

Along with ever climbing oil and commodity prices, the sell-off has hurt the peso against the dollar, the report said.

The peso was seen trading at 44.21 to the dollar.

The Philippine government bonds due 2030 slipped just 0.125 point to 129.5 bid.

Pakistan lashed out at the United States over the deaths of 11 Pakistani soldiers on the border with Afghanistan.

The soldiers are believed to have been killed by American aircraft and artillery engaged with pro-Taliban forces.

The Pakistani government bonds due 2017 were quoted at 74 bid.

In China, representatives of Taiwan landed in Beijing to hold talks with the Chinese government for the first time in nearly 10 years, the BBC reported.

The sides are expected to discuss economic issues as well as flights between the two countries.

If the meetings are successful, more are likely to follow, the report said.

Analyst rips Indonesian enthusiasm

Elsewhere in Asia, Indonesia often seems unprepared to grow the economy with the enthusiasm it claims to have, according to Harry Su, a Jakarta Post analyst.

At the recent Indonesian Regional Investment Forum, a conference designed to attract between $6 billion and $8 billion into the economy, "business people we spoke to simply could not believe that some local government officials were not able to come up with basic information, including business plans and return on investment data," Su wrote.

Officials at lower levels of government sent assistants and deputies in their places or seemed more interested in speaking on their mobile phones than in the conference. Attendees learned that a regent in Central Java did not have an e-mail address.

Despite new investment laws passed in March 2007, "government officials, more specifically decision makers, need to spend more time planning in order to create better investment deals," Su wrote.

Unfortunately, the reform process is likely to slow in the months before the 2009 elections.

The Indonesian sovereign bonds due 2017 added 0.25 point to 99.25 bid.

Romania prices €750 million

In the primary, the Republic of Romania (Baa3/BBB-/BBB) priced a €750 million 10-year bond at 98.59 with a coupon of 6½% to yield 6.698%.

The deal priced with a spread of mid-swaps plus 170 bps, which was at the tight end of the talk at mid-swaps plus 170 bps to 175 bps.

Many investors who held the Romanian bonds, which mature on June 27, 2008, "probably switched to this one," a buyside source said.

Credit Suisse, Eurobank Ergasias and UBS acted as bookrunners for the deal.

"I think they probably got done just because it's a euro-denominated issue," the buysider said, "It kind of has its own market."

When asked about sovereigns in the pipeline from Indonesia and Ukraine, the buysider said: "I don't think anyone is going to test the market."

In local currency deals, PetroChina Co. Ltd. announced its board has authorized it to issue a bond in one or more tranches worth up to 60 billion yuan.

The domestic bonds will be issued to holders of the company's A shares and have a maturity of 15 years or less.

Proceeds will be used for mid- and long-term capital requirements.

PetroChina is a Beijing-based energy firm.

Also in China, China Merchants International Holdings Co. Ltd. (Baa2/BBB) is authorized to issue up to 30 billion yuan bonds with a maturity of no more than five years.

The issue may be offered in local or major currencies; however, if the issue is placed domestically and overseas, the issue may only be 10 billion yuan.

Proceeds will be used for working capital.

China Merchants is a Hong Kong-based holding firm with interests in import and export.

Politics, inflation loom in emerging Europe

Inflation was again a major concern in emerging Europe, although it was the sector which avoided rate hikes for the session.

The benchmarks avoided calamity, but the tone in the sector sagged farther.

In Turkey, a market source said the trouble for the economy shows no signs of letting up in the coming months and will likely only get worse.

Still, a conference in Istanbul on Thursday and Friday will host investors from the Middle East who have expressed interest in Turkey, the Turkish Daily News reported.

Representatives from Turkmenistan, Azerbaijan and Kazakhstan will also attend.

The Turkish sovereign bonds due 2030 fell 0.15 point to 114.7 bid.

In Georgia, the foreign ministry said negotiations over Abkhazia must have no preconditions, the Itar-Tass News Agency reported.

"The escalated tensions in the Abkhaz conflict zone, which were caused by the latest actions of Russia, endangered peace and stability of the region and Europe at large," the foreign ministry said in the report.

Hungary was a bright spot in Central Europe, a market source said, as the country's budget seems to be more under control than some had expected.

However, trouble may be brewing for prime minister Ferenc Gyurcsany, who may be replaced under pressure from the Liberal Party's support for early elections, the source said.

Also, in the Czech Republic, lower consumption numbers led to more tempered growth in GDP, the source said.

Still, no rate changes from the current 3.75% are expected, the source added.

German euros to Russia

In Russia, the chairman of the state-run oil firm OAO Gazprom, Alexey Miller, said that the company will invest $30 billion to develop new oil resources at a conference celebrating 35 years of cooperation between Gazprom and Germany, a press release said.

Still, Miller criticized energy security moves by the West, including "initiatives in Germany which seem to promote the idea of a so-called 'Energy-NATO,' if under a different name," he said.

"The wish of Europe to diversify the sources is quite understandable. However, it seems to be based on a general assumption that anything is better than to rely on Russian energy suppliers. It is hard to see a justification for this wrong point of view," he said.

Meanwhile, German investment in Russia was up 9% in 2007, placing it near $5 billion, according to the RIA Novosti News Agency.

German investment for the first quarter of 2008 hit $408 million, the report said.

The Russian sovereigns due 2030 added 0.5 point to 113.5 bid.

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