Emerging markets slide; Asia holds in; Philippines, Indonesia bonds lower; Primary cools off

By Aaron Hochman-Zimmerman

New York, June 26 - Characterizations of emerging markets on Thursday ranged from "awful market" to "not good" and "sort of messy."

On the U.S. side, financial stocks were pounded and led a wholesale retreat of 358 points from the Dow Jones Industrial Average as oil set a new record above $140 per barrel.

In the emerging market secondary, the benchmark issues of the Philippines and Indonesia were damaged for close to 1 point each, but Asia survived the day with as little suffering as could be expected, a trader said.

In the primary, roadshows ended for the $500 million sovereign issue from Ukraine and the $150 million offering from Brazil's Camil Alimentos, but the difficult session kept both on the shelf during the business day.

The equity rout left volatility to make a steady climb throughout the day to end up by 2.79 to 23.93, according to the VIX index. The index is a commonly used measure of market volatility.

Treasuries took off as stocks were kneecapped, which pulled emerging markets wider by 12 basis points to a spread of 283 bps, according to the JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia could be worse

Asian trading took a mild beating on Thursday as stocks were tumbling and oil was setting new records.

"It's not looking too good," a trader said, as "CDS and indices are wider, but they're not dramatically wider."

Swaps were 3 bps to 4 bps wider for high-grade paper, the trader said, while the investment-grade index traded near 155 bps.

The high-yield index traded 5 bps to 10 bps wider at around 555 bps.

The Philippines and Indonesia five-year CDS were both wider by 6 bps to 7 bps, he said.

In cash terms, issues were generally lower by 1 point, he said.

In broad terms, "it's holding alright," he said.

"We saw most of the weakness in the cash markets," he said, which was brought on by "guys trying to get balance sheets down ahead of the quarter's end."

In the Philippines, the government announced a first-quarter surplus of $1.7 billion, up 21% from the $1.4 billion surplus during the first quarter of 2007, according to a news release from the central bank.

The number leaves the current account at $1.2 billion.

Still, inflows to the country's direct investment account dropped to $621 million in the first quarter, 61% lower than the inflows seen during the same period of 2007.

The Philippine government bonds due 2038 dropped 0.875 point to trade at 96, while the bonds due 2031 dropped 1 point to 105 bid.

In Indonesia, an organization to standardize Islamic finance was created as a joint project between the Indonesian Banking Development Institute, the Islamic Development Bank, the University of Kuwait and the Malaysia Islamic Banking and Finance Institute, the Jakarta Post reported.

The new International Center for Development in Islamic Finance (ICDIF) will provide educational materials, training and fee-based consulting, the report said.

Shariah compliant banks currently represent nearly 2% of the Indonesian banking market, but the government hopes to raise the market share to 5% by the end of the year.

The Indonesian sovereigns due 2017 were quoted at 95.5 bid, 96.25 offered.

Also in Pakistan, new regulations to prevent violent drops in share prices on the Karachi Stock Exchange did not do much for the country's debt, the trader said.

The Pakistani bonds due 2017 were quoted at 73 bid, 77 offered.

Also in corporates, the new tranches from India's Vedanta Resources plc were mostly well supported by the market, the trader said.

"There were two-way flows for both issues," he said. "It's trading within three-eights of a point to the reoffer price."

Both tranches were priced at par.

Brazil's beef gets burned

Brazil's beef sector has been "underperforming in a big way," said a strategist specializing in Latin American corporate debt.

For starters, an outbreak of the blister-causing disease Stomatitis is raging in the state of Mato Grosso.

The disease is not as serious as Foot and Mouth disease, but as a result "Russia won't import from that state," the strategist said.

Cattle prices have also soared in Brazil, and it has become more costly to raise capital "with the prospects of higher rates in Brazil."

"Arantes [International] performing poorly doesn't make people excited about jumping in," the strategist said about the debt market.

Beef has also been weighed down by the universal problem of the mortgage crisis, which has slammed both the housing and auto markets.

Within the larger livestock sector, the leather business strongly relies on the furniture industry and the auto industry, which needs leather seats, the strategist said.

"This is complicated ... There are all these issues to think about," the strategist added.

The Arantes bonds due 2013, which priced at 99.046 on June 12, were quoted at 94.5 bid, 96.5 offered.

The Independencia International bonds due 2015 were seen at 96.5 bid, 97.5 offered.

The Grupo Friboi bonds due 2016 were quoted at 101.25 bid, 102.25 offered.

"I don't think anyone wants to trade at these levels," the strategist said.

LatAm hit by externals, politics

Latin America's high-yield issues were wider on the Treasury rally on Thursday.

Meanwhile in Argentina, the farmers and the government accused each other of lying as any progress made during Wednesday's "positive" talks evaporated.

The government said the farmers have been breaking the rules of their own export blockade, presumably without paying taxes on any goods exported, the Buenos Aires Herald reported.

Farm leaders flatly denied the government's claims.

"Those who have been lying about the Indec will do nothing, but to continue lying," farm representative Mario Llambias said in front of a crowd assembled near the congress.

Also in Ecuador, president Rafael Correa said he does not intend to restore diplomatic relations with Colombia until president Alvaro Uribe leaves office in 2010.

Recent trouble between the two began on March 1 when the Colombian military pursued FARC militants across the Ecuadorian border, killing 17.

Russia, Venezuela talk business

In Russia, prime minister Vladimir Putin met with Venezuela vice president Ramon Carrizales to arrange for greater economic cooperation between the countries' industry, particularly in the energy sector.

"Our major companies such as Gazprom, LuKoil, Russian Railways show interest in cooperating with partners in our country," Putin told reporters.

In 2007, trade volume between the two hit $1.1 billion, according to the Itar-Tass News Agency.

Militarily arms sales to Venezuela may follow the 24 Su-30 Flanker fighters, air defense systems and helicopters it purchased in 2005 and 2006, according to the RIA Novosti News Agency.

Reports varied over the question of a possible sale of submarines to Venezuela.

Further talks are expected during the end of July, when president Hugo Chavez will likely visit Russia.

The Russian government bonds due 2030 slipped 0.125 point to 112.375 bid.

Emerging Europe wider with equities

Emerging Europe was drawn wider as a day full of bad news in the financial world took its toll.

In Romania, the central bank provided the day's interest rate action by raising rates 25 bps to 10%, according to a statement from the bank.

The bank cited a decrease in inflation during May to 8.46% from 8.62%.

Still, the bank said it is "standing ready to use the central bank's entire array of instruments to counteract inflationary pressures."

Also in Turkey, inflation remains a concern, but has dropped 30% to single-digit figures since 2002, prime minister Recep Tayyip Erdogan said at an economic forum in Istanbul, according to the Turkish Daily News.

Still, exports were up $36 billion to $121 billion in that time, he said.

The Turkish sovereign bonds due 2030 were quoted at 142 bid.

Meanwhile in South Africa, national and metro police exchanged gunfire as the national force attempted to disperse striking metropolitan officers in Johannesburg on Thursday, according to the BBC.

Seven metro policemen were hurt by rubber bullets fired by the national police, the report said.

A misunderstanding and the lack of communication may have led to the local officers returning fire with live bullets, although union officials denied any use of live ammunition, saying the national police would have suffered a "bloodbath" if they had.

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