Emerging markets tighten; Venezuela postpones bond buyback; primary ends strong week of activity

By Aaron Hochman-Zimmerman

New York, July 25 - Emerging markets followed Treasuries tighter on Friday but saw light trading on a characteristically slow summer's day.

Venezuela announced it will delay the much anticipated bond buyback program as its benchmark bonds due 2027 shed 0.5 point.

In the primary, the major currency pipeline was already shut down for the weekend, although a strategist said that Monday should bring renewed energy to the market.

New issuers such as Alfa Bank Ukraine and Russia's Home Credit & Finance Bank have been waiting on the calendar with guidance issued.

Elsewhere, a manic day in equities ended with volatility numbers lower by 0.53 at 22.91, according to the VIX index. The index is a common yardstick of market volatility.

As a sector, emerging markets wound tighter by 8 basis points to a spread of 276 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 8 bps with a spread of 308 bps.

The diversified index has a less strict liquidity rule for inclusion.

"I'm sure that's Treasury related," a strategist said about the tightening indices.

Quiet LatAm trades mixed

Latin American traders sat through another quiet and illiquid summer session on Friday, while in Venezuela, finance minister Ali Rodriguez told reporters that the government's highly anticipated bond buyback will be postponed for the time being, a market source said.

"It seems like they do that a lot," an emerging markets strategist said, adding that the finance ministry often seems to have trouble deciding whether it wants to buy back bonds or issue more debt.

Meanwhile, as his European tour continues, president Hugo Chavez was greeted cordially in Madrid with a handshake and a pat on the shoulder by Juan Carlos, king of Spain.

The refurbished friendship comes after Juan Carlos was heard suggesting to Chavez "why don't you shut up" at the Ibero-American summit in Chile last November.

The 9¼% Venezuelan sovereign bonds due 2027 slipped 0.5 point to 91 bid, 92 offered.

Also in Ecuador, a special legislative committee approved a new draft constitution that will be offered to voters in a referendum on Sept. 28.

If approved, the new constitution would allow president Rafael Correa to run for another term in office and would give the president economic powers currently held by the central bank.

The 8% Ecuadorian bonds due 2030 were spotted at 91 bid, 92 offered.

Meanwhile in Brazil, after the higher-than-expected 75 bps rate hike, whereas some expected 50 bps, a market source said that the central bank took appropriate action to rein in inflation.

Still, even with another rate hike of 25 bps in the first quarter of 2009, inflation will likely hit 5% in 2009, ahead of the central bank's goal or 4.5%, the source said.

The 7 1/8% Brazilian bonds due 2037 were quoted unchanged at 110.5 bid, 110.75 offered.

Emerging Europe sheds early weakness

Emerging Europe traded with a weak open, but modest success in the U.S. market helped push issues tighter throughout the day, a market source said.

In Russia, the ambassador to Ukraine was summoned to the foreign ministry to discuss the detention of prominent Russian duma minister Konstantin Zatulin at the Ukrainian airport in Simferopol, reports said.

The Ukrainian security service charged Zatulin with attempting to destabilize the country.

Zatulin was previously blacklisted by the Ukrainian government over his criticism of joint NATO-Ukrainian naval exercises in 2006, but both Moscow and Kiev agreed to rescind all blacklists in 2007.

The Russian government bonds due 2030 were quoted at 111.6 bid, 112.3 offered.

Meanwhile in Bulgaria, the parliament overwhelmingly approved a joint effort with Russia to build the South Stream gas pipeline through Bulgaria on its way to Western Europe, reports said.

The pipeline will be built by both Russia's OAO Gazprom and Italy's ENI.

The opposition argued that the deal would make Bulgaria more dependent on Russian fuel and would undercut the efforts of the European Union-backed Nabucco pipeline.

Elsewhere in emerging Europe, Turkey's ministry of industry and trade announced a new proposal that will offer more transparency in the retail marketplace, the Turkish Daily News reported.

"In the future the price tags of products sold in sales will have to have both the original and the discount price," said minister Zafer Caglayan at a press conference in Istanbul.

"Original price of a sales product is something many consumers have doubts about," he said in the report.

Also, after a recent court decision removing a credit card customer's annual fee, many believe all annual fees will be abolished.

Asia tightens off overnight

Asia left behind a weak overnight session and made up some ground through thin volumes on Friday.

In the Philippines, imports jumped by 11.3% to $4.7 billion in May, according to data released by the National Statistics Office.

Electronics were responsible for the largest segment of the imports at 31.5% followed by petroleum, oil products and lubricants at 24.7%.

Exports grew as well, by 3.1% or $21 billion, but still left a trade deficit of $559 million in April, up from $168 million at the same point last year.

In Indonesia, the country's second-largest lender, Bank Central Asia, posted a 49.5% increase in lending during the first half, compared to the same period of 2007, the Jakarta Post reported.

Through the first five months of 2008, the bank lent 95.6 trillion rupiah, the report said.

Loans to the corporate sector were up by 41 trillion rupiah, or 64.5%, on the back of a greater need for capital from the telecom, agriculture and mining sectors.

Also, "demand was higher for housing and vehicle loans since we have not yet made an upward adjustment in our interest rates in line with the central bank's benchmark rates," said BCA vice president Jahja Setiaatmadja at a press conference.

Elsewhere in India, one person was killed as seven bombs exploded in a Bangalore commercial district within a 15-minute period, reports said.

Police are investigating the attacks.

Also in India, the state of Maharashtra will have its access to electricity limited by authorities.

"Industrial staggering or power cuts have been increased for industries to 40 hours per week," Maharashtra Electricity Distribution Co. Ltd. official Ajay Bhushan Pandey told reporters, according to the BBC.

Within the last five years, rising demand in the area has been met with no substantive improvements to the power grid, the report said.

Primary ends quietly

The primary ended the week quietly but still managed a strong performance over the week, which began on July 21.

The strong showing was tempered by volatile externals and the summer season, but the market is expected to sustain itself at least for another week, a strategist said.

However, "there's still about $70 billion on the calendar and it's an awful lot to cram into the end of the year," he said, adding that "The $40 billion of sovereigns are probably not going to manifest."

Meanwhile in local-currency deals, Russia's LSR Group (B1//B+) announced the pricing of a 5 billion ruble bond.

Proceeds from the issue will go to refinance debt and fund investment projects.

LSR is a St. Petersburg-based construction company.

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