Emerging markets pulled wider; Philippines, Indonesia outperform on day; Major new issues stuck

By Aaron Hochman-Zimmerman

New York, July 14 - Emerging markets credits widened Monday as stocks gave back a morning rally inspired by backstop assurances made by the U.S. government for Fannie Mae and Freddie Mac.

Still, trading was generally light and uneasy.

"Best I could tell, nothing was going on," a syndicate official said. "No one has any conviction in this market."

Still, the Asian credits from the Philippines and Indonesia managed to improve and were the day's outperformers.

In the primary, the major issues from the Commonwealth of Independent States such as Russia's OAO Severstal and OAO TMK as well as the sovereign from Ukraine continued to ripen on the vine as the market was not in a spirit to handle a major new issue.

Meanwhile in the broader market, equities rallied but sold off in the afternoon to end lower as volatility was up another 0.99 to close at 28.48, according to the VIX index. The index is a frequently used gauge of market volatility.

Treasury yields tightened on the flight to quality as emerging markets widened by 9 basis points to a spread of 308 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will accept to hold assets in emerging markets debt.

Asia loses overnight rally

Asia "rallied pretty sharply overnight," a trader said, as the U.S. government offered a backstop for Fannie Mae and Freddie Mac.

Still, "we came off the tights today," he said, on a "moderately busy" Monday.

"CDS is off the tights," he said along side equities, which rallied close to 150 points on the Dow Jones Industrial Average but closed lower by 45 points.

However, "we're still seeing relative strength across the board in [Philippines] and [Indonesia] cash," he said.

In the Philippines, the lower house of the legislature's ways and means committee pushed for a higher excise tax to replace revenues on petroleum lost since the elimination of the value-added tax.

The new tax would draw PHP 18.6 billion and would be based on consumption, not on market price, said Rep. Exequiel Javier of Antique, according to the Manila Times.

There has been no comment from the finance department about the proposal.

The Philippine sovereign bonds due 2030 were seen at 123.5 bid, 124 offered.

In Indonesia, the central bank reported that the rupiah hit a three-month high last week, the Jakarta Post reported.

Investment came at a faster pace in the second quarter, the report said, and the finance ministry expects even more domestic and foreign investment in the second half.

The rupiah was seen trading at 9,136.66 to the dollar.

The Indonesian government bonds due 2017 were spotted at 97.375 bid, 97.875 offered.

In corporates, Singapore's MagnaChip Semiconductor saw a bump in its 8% notes due 2014, which were up by 3 points to 40 bid, a trader said.

Its 6 7/8% bonds due 2011 and floating-rate notes due 2011 were mostly unchanged, the trader added.

LatAm wider on externals

Feeling risk averse, Latin America traded lightly and widened out as equities tumbled from the day's highs.

In Argentina, farmers demonstrated during the weekend in order to influence senators as they are expected to vote on the government's export tax bill on Wednesday.

"This government wants to freeze the country and ransack the farmers," said farm leader Alfredo De Angeli, according to the Buenos Aires Herald, after the government accused the farmers of plotting or at least encouraging a coup.

"It's the government that is promoting a coup, because it doesn't know how to fix this country," De Angeli said.

In Venezuela, president Hugo Chavez met with his perennial rival Colombia president Alvaro Uribe.

The two countries are major trading partners but are often at odds politically.

As recently as March troops were mobilized on both sides after the Colombian army conducted operations against the FARC within the borders of Ecuador.

Both leaders had newfound pleasant words for each other and committed themselves to working past their differences.

Furthermore, on Chavez's diplomatic calendar, a meeting is scheduled with Russia's president Dmitry Medvedev on July 22.

The two are likely to discuss a proposed joint banking venture as well as other industrial projects, the RIA Novosti News Agency reported.

Also in Latin America, workers at Brazil's state oil company Petrobras went on strike on Monday over poor working conditions on offshore rigs in the Campos basin.

Nearly 80% of the oil processed by Petrobras comes from the Campos basin.

Company officials have said that output would not suffer significantly, but some had supply concerns.

Light sweet crude traded over $146 per barrel on Monday.

Elsewhere in corporates, Brazil's Marfrig arranged to buy divisions of the international food producer, the United States' OSI Group, for $680 million in cash and stock, according to a market source.

The company's growth is encouraging for its future prospects, the source said.

The Marfrig 9 5/8% bonds due 2016 were quoted at 93.75 bid, 94.75 offered, while the 9½% bonds due 2017 were quoted at 91.5 bid, 92.5 offered.

Light action in primary

"No one's going to do anything in this market," a syndicate official said.

"Everyone's watching bank earnings," the official said, adding that barring the extraordinary "I don't think it's going to change."

Still, at the end of last week some were feeling optimistic about a possible resurrection of the primary market, but Monday saw no movement of the major deals waiting in the pipeline.

Russia's OAO Severstal and OAO TMK as well as Ukraine's expected sovereign were all silent to open the week.

"It's very slow," another syndicate official said.

However, Brazil's Banco Daycoval SA (BB-/BB-) priced $100 million three-year senior unsecured bonds at 99.669 with a coupon of 7¼% to yield 7 3/8%.

The issue was priced through the bank's Cayman Island branch.

Banco Itau Europa, Banco Votorantim and HSBC acted as bookrunners for the deal.

The bank is a Sao Paulo-based retail and commercial bank.

Also in local currency deals, Malaysia's RHB Capital Bhd. announced it has established a program to issue up to 600 million rupiah tier I bonds at par or a premium for a tenor of up to 60 years.

RHB is a Kuala Lumpur, Malaysia-based financing firm.

Israel's Hadera Paper Ltd. (AA-, local) priced NIS 800 million series III and series IV debentures. The offer was upsized from NIS 150 million.

The series III debentures have a maturity of 5.2 years and will carry a coupon of 4.7% linked to the Israeli CPI. The series IV debentures have maturity of 3.8 years and will carry a coupon of 7.45%.

Proceeds from the sale will be used to fund a new production line.

Hadera, formerly American Israeli Paper Mills Ltd., is a Hadera, Israel-based paper manufacturer.

Also, China's Beijing North Star Co. Ltd. announced it will offer 1.7 billion yuan five-year bonds.

The interest rate will be between 7½% and 8.6%.

UBS will act as bookrunner for the deal.

Beijing North Star is a Beijing-based real estate firm.

Emerging Europe still, sturdy

Trading in emerging Europe was calm and held a better tone as the morning in the United States remained encouraging.

In Russia, president Dmitry Medvedev announced that he would like to see competition between health care providers.

"The problem of competitiveness in the field of health service needs most serious attention. There is either no such competitiveness at present, or practically, it is barely noticed," he said at a health care conference, according to the Itar-Tass News Agency.

Meanwhile in Ukraine, a new political party took shape over the weekend.

The United Center (UC) met in Kiev on Saturday when 2,000 delegates met to choose party leaders and to approve the party's charter.

The UC will enter the volatile political arena in Kiev on the side of the president.

The party "consciously shares Ukrainian president Viktor Yushchenko's action program and will do its best to assist the head of state in implementing it. We are the president's allies and we have common goals," the party said in a statement, according to Itar-Tass.

Turkey nabs Iraqi oil deal

In Turkey, on a recent trip to Baghdad, prime minister Recep Tayyip Erdogan signed an agreement with Iraq's government that will give the Turkish Petroleum Corp. the rights to development Iraqi oil, the Turkish Daily News reported.

Also in Turkey, federal prosecutors have filed charges against 86 people for allegedly taking part in a plot to overthrow the government.

In the time since June 12, 2007, dozens of arrests have been made in connection with a crate of hand grenades found in the home of a retired soldier, reportedly a member of the nationalist Ergenekon group.

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