Emerging markets beaten back; Market watches for rate hikes; SK Energy prices $450 million

By Aaron Hochman-Zimmerman

New York, June 12 - Emerging markets suffered through a difficult day in price terms, but in the primary a strong start for equities loosened the primary pipeline.

South Korea's SK Energy Co. Ltd. took advantage of the equity improvement to price $450 million, but investors are still focused on Indonesia as a gauge of the primary.

Light flows in trading saw curves stamped flat across the sectors as a rate hike was announced in South Africa and hikes were discussed in both Brazil and the United States.

Some economists are now predicting a 25 basis point increase from the Federal Reserve in September, a syndicate official said.

"I'm starting to become very concerned about higher interest rates," a strategist said.

Elsewhere, the equities that started strong trailed off slightly into the afternoon but left volatility lower by 0.79 at 23.33, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets tightened in by 7 bps to a spread of 242 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

Emerging Europe tighter, weaker

After a few sessions soured by news from the United States, emerging Europe tightened on average about 3 bps to 5 bps in large part due to a higher open and a strong morning on Wall Street, a source said.

In Turkey, it will be a "few years" before investors see high growth numbers, finance minister Kemal Unakitan said at a press conference, according to the Turkish Daily News.

He said the government will act "with prudence" to deal with the broadening inflation crisis brought on by food and fuel costs.

"If that situation is corrected, then Turkey's status will improve; however, I doubt we will get to see the reflections of these improvements in 2008. Maybe some developments may take place during the third and last quarter of the year," he said in the report.

As a result of the problems, Turkey will miss its $18.5 billion foreign direct investment goal by up to $4.5 billion, he said.

The lira was seen trading at 1.255 to the dollar.

The Turkish government bonds due 2030 fell 0.5 point to 146.5 bid, 147 offered but is 4.625 points lower than last Thursday's close.

In Ukraine, Standard & Poor's cut the country's debt rating to B+ from BB-.

A market source said the country had no discernable policy for the future or to deal with its current deficits.

S&P also cut the capital to B+ from BB-.

The Ukrainian bonds due 2016 were quoted at 94.25 bid, 95 offered.

Meanwhile, Russia's sovereign bonds due 2030 were quoted at 113 bid, 113.375 offered.

South Africa hikes rates

South Africa followed hikes by India and Chile with Thursday's rate hike of the day.

The central bank set interest rates 50 bps higher at 12%.

The country has seen a slight rebound in manufacturing, a market source said, but the country has recently been plagued by violence, power outages and significant inflation.

"Global inflation is becoming a huge problem," a strategist said.

The rand was seen trading at 8.125 to the dollar.

The South African government bonds due 2017 were quoted at 117.5 bid, 118.5 offered.

LatAm readies for higher rates

Latin American trading absorbed some damage on Thursday as the 10-year Treasury set a new high for the year.

"Curves are flattening significantly here," a strategist said about "Peru and Colombia and many of the high-grade credits."

"Clearly the market is preparing itself for higher interest rates" from the United States, he said.

The 7 3/8% Colombian bonds were quoted at 109.75 bid, 110.25 offered.

In Argentina, truckers fired small arms at fuel tankers as they attempted to pass a highway blockade in the Entre Rios province on Wednesday, the Buenos Aires Herald reported.

No injuries were reported by the police.

Tensions were also strained between farmers and the government by a San Nicolas, Buenos Aires, province prosecutor who requested the indictment of farmers who were arrested for blocking roads, the report added.

The 8.28% Argentine discount bonds due 2033 sank 1.625 points to 81 bid, 82 offered.

In Brazil, significant rate hikes may be on the way from the central bank, a source said, noting rates may jump another 3.5% in 2008.

A syndicate official said many are expecting the next hike to be 75 bps.

The 11% Brazilian bonds due 2040 slipped 0.7 point to 132.75 bid, 132.95 offered, while the 7 1/8% bonds due 2037 lost 1.55 points to 113 bid, 113.5 offered.

Chavez tries reforms

In Venezuela, president Hugo Chavez cut taxes on financial transactions and streamlined the process of importing goods in order to spur the economy and bottle up inflation.

Overall, there is reason to be bullish in the near term, a market source said.

Even after Venezuela's strong performance, the price of oil will continue to support the sovereign, the source said.

In the long term, the economy may become dependent on oil, the source said.

If Venezuelans forego investment in other areas, the country will become more reliant on imports, the source said.

A new sovereign issue is also unlikely. The current buyback program will probably continue into the foreseeable future, the source said.

The 9¼% Venezuelan sovereign due 2027 lost 0.15 point to 96 bid, 96.5 offered.

Another source said the bonds due 2027 are likely to tighten another 100 bps.

Corporates price, Poland talks

The primary jumped on the positive morning for equities to move a few issues through the pipeline, a syndicate desk official said.

"It's totally day by day," the syndicate official said.

Still, eyes are on Indonesia and its sovereign to gauge the health of the market, the official said.

Some were surprised to see Indonesia back on the calendar in 2008, but "the fuel subsidies are costing too much," the official said, adding that the country's credibility has been rattled by its recent inflation and economic problems.

On the corporate side, SK Energy Co. Ltd. (Baa2/BBB/) priced $450 million five-year senior unsecured bonds at 99.111 with a coupon of 7% to yield 7.215%. The deal priced with a spread of mid-swaps plus 275 bps.

Citigroup, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS acted as bookrunners for the Regulation S-only deal.

SK is a Seoul-based energy firm.

Also, Brazil's Arantes International Ltd. (B2//B) priced $150 million five-year senior unsecured bonds at 99.046 with a coupon of 10¼% to yield 10½%.

The deal was talked at 10½%.

Credit Suisse and Banco Santander acted as bookrunners for the deal.

Proceeds will be used to refinance short- and long-term debt.

Arantes is a Rio de Janiero-based beef producer.

"I guess they didn't have enough demand for the $200 [million] that they were looking for," a strategist said.

Although, the issue was seen trading tighter by about 5 bps or 6 bps.

Elsewhere, the Republic of Poland talked its €2 billion 10-year bonds at mid-swaps plus 60 bps.

ABN Amro will act as bookrunner for the issue, which is expected Friday.

"That's in its own category," a syndicate official said, implying that it should face few troubles pricing.

Rand deals surface

In local currency, the South African National Roads Agency Ltd. (Aa2, local) announced plans to offer up to ZAR 2 billion senior unsecured notes over four tranches.

The offer includes a consumer price index-linked 4¼% five-year note, and three 12¼% notes due in 2018, 2021 and 2028.

The notes are expected on July 10.

Absa Capital, First Rand Bank and Vunani Capital will act as bookrunners for the deal.

The notes will come from a ZAR 10 billion medium-term note program.

Sanral is a Tshwane, South Africa-based government-run infrastructure management entity.

Also in South Africa, the City of Capetown (Aa2, local) announced plans to offer up to ZAR 1 billion 15-year senior unsecured bullet bonds.

Absa Capital and Vunani Capital will act as bookrunners for the Regulation S deal.

The issue, from the city's ZAR 7 billion MTN program, is expected on June 18.

Capetown is the legislative capital of South Africa.

Asia prices sink

Asian trading saw the benchmark issues generally lower, a trader said.

"It's a little bit messy," he said, as issues become hitched to Treasuries.

"Today we saw some pretty big moves in the cash curve," he said, "prices are down around a point in the belly of the curve."

Indonesia was especially hard hit, he said.

The Indonesian bonds due in 2017 were lower by 0.75 point at 98 bid, 98.5 offered.

Also, in Indonesia, the government's budget for 2008 will be able to withstand oil prices at $150 per barrel and above, said the head of the finance ministry's fiscal policy, Anggito Abimanyu, according to the Jakarta Post.

Even at prices of $135 per barrel to $150 per barrel, government revenue would stay ahead of expenditure, she said.

Light sweet crude was seen trading at $136 per barrel.

In the Philippines, consumer confidence suffered a drop of 44% in the second quarter, according to a survey by the central bank, the Manila Times reported.

Consumer confidence also fell 27% for the third quarter and 20% for the next 12 months.

The Philippine sovereigns due 2030 were unchanged at 129.5 bid.

China published a consumer price inflation rate at 7.7% in May, down from 8.5% in April.

The good news was somewhat expected, but the specter of rate hikes "continues to weigh on the market there," the trader said.

Former PM to march to Islamabad

In Pakistan, where the credits have often been a victim of political risk, former prime minister and leader of the Pakistan Muslim League (PML-N) Nawaz Sharif plans to march with protesting lawyers on their way from Lahore to Islamabad.

The march to Islamabad is the last leg of a journey, which began in the southern city of Sukkur, in support of reinstating the judges fired by president Pervez Musharraf in November.

"The issue of the restoration of the judiciary is as important as the food we eat every day," Sharif said at a press conference.

Along with Sharif, the lawyers are calling for Musharraf's impeachment if he does not restore the judges.

Also, inflation hit a record in May at 19.3% and is likely to increase further, a market source said, with no end in sight to rising food costs.

The rupee was seen trading at 66.71 to the dollar.

The Pakistani sovereigns due 2017 were flat at 74 bid, 76 offered.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.