Emerging markets fall; Spillover keeps trading light; Brazil, high-betas wider; Russian banks dip

By Aaron Hochman-Zimmerman

New York, June 27 - Emerging markets fell victim to spillover from the U.S. side again on Friday.

Still, the actual damage went only as far as investors were willing to trade, and "trades across the board are really minimized," a syndicate desk official said on Friday.

In trading, typically stable Brazil was pulled wider by Treasuries along with its counterpart high-beta credits in Latin America.

Brazil's bonds due 2037 were seen at 110.65 bid.

Meanwhile, the primary took another day to regroup after its stream of benchmark issues.

Elsewhere, emerging market bond funds suffered $215 million of outflows during the week ended Wednesday, according to EPFR Global.

The losses represent the third consecutive week of outflows from the sector.

Generally the market tone was weak, but volatility dropped by 0.49 to 23.44, according to the VIX index. The index is an often used yardstick of market volatility.

With spreads following Treasuries, emerging markets widened by 6 basis points to a spread of 294 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 6 bps with a spread of 316 bps. The diversified index has a less strict liquidity rule for inclusion.

Emerging Europe slips

Trading in emerging Europe looked better on Friday than during Thursday's market rout, a syndicate official said.

A better market than Thursday is a low standard, he implied, but still "it's not looking fantastic."

Russia's banks were hit particularly hard in trading, a market source said.

Also, Ukraine's UkrSibbank just completed a roadshow but has not announced a deal, another source said.

Meanwhile in Russia, president Dmitry Medvedev met with representatives of the European Union in the city of Khanty-Mansiysk in Siberia to work through a new strategic agreement.

The meetings dealt heavily with economics and will lay the groundwork for the official talks on July 4 in Brussels.

Both sides reported that the meetings were friendly and productive.

Prime minister Vladimir Putin did not attend the meetings, but foreign minister Sergei Lavrov did accompany the president and was questioned about Russia's intentions with the Abkhazia as Georgia accused Russia of helping divide the province into Russian and Georgian spheres of influence, according to the RIA Novosti News Agency.

"It's a lie. It is totally untrue," Lavrov said in the report, as he tried to impress Russia's perspective of the conflict upon reporters.

"The issue is not big Russia trying to hurt small Georgia, but rather that big Georgia cannot settle disputes with small Abkhazia and South Ossetia."

The Russian sovereign bonds due 2030 fell 0.25 point to 112.125 bid, 112.375 offered.

Elsewhere in Turkey, an environmentally friendly fund was created by Isbank Securities, the nation's largest publicly traded bank, according to the Turkish Daily News.

Holdings under the fund's umbrella include TSKB, a privately owned Turkish investment and development bank, Zorlu Energy and Turkish Automotive Factory Inc.

Companies can be considered for inclusion in the fund if they have a clean environmental law record, do not produce weapons or tobacco or engage in mining for gold.

Environment funds are expanding worldwide, the report said, and represent total investments of $201.8 billion in the United States and $75.4 billion in Europe.

The Turkish government bonds due 2030 sank 1.5 points to 140.5 bid, 140.75 offered.

Primary confronted with supply

With so many recent benchmark issues, particularly from Russia and its neighbors, the new supply hitting the market is becoming more burdensome on the secondary market, an emerging markets strategist said.

"It's already weighing on bonds in the [Commonwealth of Independent States]," he said.

"The traders are worried about the impending supply," he said, referring to the old market adage of "Why buy today when I can buy cheaper tomorrow?"

"Issuers are now willing to make concessions and price cheaply, and that's a problem for existing issues," he said.

"I've been kind of shocked that issuers haven't decided to wait for that eventual window," he said.

Egypt ups rates

The central bank in Egypt provided the rate hike for the day, by increasing its overnight deposit and lending rates by 50 bps to 10.5% and 12.5%, according to a press release.

In its accompanying statement, the bank cited CPI inflation of 19.7% in May as food costs soared by 27%, the bank said.

Weather concerns have played into the market by threatening crops and adding to prices.

The bank said it "will not hesitate to adjust the key CBE rates to ensure price stability over the medium term."

The Egyptian pound was seen trading at 5.336 to the dollar.

Colombia, LatAm pulled wider

Latin America saw some widening as equities were pounded again by record-setting oil and consumer confidence figures.

Still, the sector survived without losing too much blood on very light trading.

"On a CDS basis, they've widened out a little bit," a syndicate official said.

"Colombia was the underperformer today; it widened out 10 bps," he said.

The 6% Colombian sovereigns due 2017 were quoted at 108.75 bid, while the 7 1/8% bonds due 2037 were seen at 108.5 bid.

The five-year CDS of the high-beta credits from Venezuela and Argentina were wider by 7 bps and 4 bps, respectively.

Brazil usually widens less than the high-betas, the official said, but Friday the five-year CDS stretched out 5 bps.

The 7 1/8% Brazilian bonds due 2037 were seen at 110.65 bid.

Also, record oil prices close to $143 per barrel were not enough to pull Venezuela positive.

The 9¼% Venezuelan sovereigns due 2027 were quoted at 92.75 bid.

Legislators lean toward concession

In Argentina, president Cristina Kirchner and her government may be forced to make concessions over the export tax issue as legislators are showing only moderate support for the bill, which is on the floor of the congress, according to the Buenos Aires Herald.

Introducing the bill to the congress was not a necessary step, but was done in an attempt to consolidate support for the taxes.

Still, even with a majority of Kirchner's Peronist Party in the legislature, the strategy may be in jeopardy, the report said.

"She's going to have some serious issues going forward," the syndicate official said.

The 8.28% Argentine discount bonds due 2033 were seen at 76.35 bid.

Asia finds some gains

Asian trading was light on another ugly day for equities.

Still, Asian issues held some ground ending mixed.

In the Philippines, consumer price inflation may begin to take a toll on the country's sovereign credit rating, Fitch Ratings said in a statement, according to the Manila Times.

Finance secretary Margarito Teves said that foreign borrowing may resume despite a planned moratorium in order to balance the budget by 2010.

The peso was seen trading at 44.801 to the dollar.

The Philippine government bonds due 2030 were quoted at 121.5 bid, 124.125 offered.

"That's a huge bid, offered spread," a strategist said.

In Indonesia, the state-run gold and nickel mining firm PT Aneka Tambang announced plans to offer a 2.05 trillion dividend to shareholders, the Jakarta Post reported.

The dividend will make up 40% of the company's 2007 profits, but those profits were 231% larger than the figures for 2006.

The company is planning an acquisition of Australia's Herald Resources Ltd. in order to diversify away from its heavy reliance on nickel.

The Indonesian sovereigns due 2017 were better by 1 point at 96.5 bid, 97 offered.

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