Emerging markets wrap tighter; Turkey's AK Party beats ban; Transneft, Hong Kong & China Gas on tap

By Aaron Hochman-Zimmerman

New York, July 30 - Emerging markets felt healthier as the external market performed well again on Wednesday.

Still, successes were tempered by low end-of-month volumes.

In trading, Turkey's benchmark bonds due 2030 added 2.15 points after the constitutional court decided to allow the ruling AK Party to remain at the head of government and in existence.

If the party was disbanded, prime minister Recep Tayyip Erdogan and president Abdullah Gul may have also been barred from politics for five years.

Meanwhile in the primary, Russia's OAO AK Transneft issued talk for its benchmark two-tranche deal, while whispers were heard for another expected benchmark from Hong Kong & China Gas Co. Ltd.

Elsewhere, another strong day for stocks cut volatility by 0.82 to 21.21, according to the VIX index. The index is a standard measure of market volatility.

Equities' success rolled back Treasuries again as emerging markets tightened by 8 basis points to a spread of 269 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.

Turkey's AKP narrowly spared

In Turkey, bonds jumped as judges voted six to five in favor of disbanding the party of prime minister Erdogan. However, seven votes were needed to disband a party.

On their third day of deliberations, only one of the 11 judges, the court president Hasim Kilic, voted against any punishment for the party. The 10 remaining judges felt some form of punishment was necessary.

"We believe that the political party concerned will get the message it should from the verdict," Kilic said, according to the Turkish Daily News.

Simply for allowing the case, the country's political system drew fire from the European Union.

E.U. representatives said that these types of questions should be settled by votes by the people or in parliament, not in court, adding that the case may damage Turkey's chance of E.U. accession.

"None of our judges can say he or she is happy with closure cases. But unfortunately Turkey discusses rules of party closure only when a closure case is filed. We would prefer that changes would be made before opening of closure cases," Kilic said in the report.

The case against Turkey's ruling AK Party was first brought by chief prosecutor Abdurrahman Yalcinkaya on March 14 alleging that the party intended to undermine secular democracy by pushing unconstitutional and pro-Islamic policies.

The parliament's repeal of a ban on the wearing of headscarves by women attending public universities on Feb. 11 became a major sticking point.

The lira was seen trading at 1.164 to the dollar.

The Turkish government bonds due 2030 were seen up 2.15 points to 149.15 bid, 149.65 offered.

Emerging Europe follows Turkey up

Emerging Europe's issues traded tighter as the AK Party was given its good news and U.S. equities posted another strong day.

Meanwhile, Russia's OAO Lukoil, the country's largest independently owned oil producer, recently announced the purchase of Turkey's Akpet, which owns 693 gasoline service stations covering about 5% of the Turkish retail market, a press release said.

Akpet also controls oil and gas storage facilities as well as land and sea transport terminals.

"Acquisition of large retail assets in Turkey expands Lukoil international retail network by 18%. It is one of the key elements of the company's downstream strategy in the Black Sea and Mediterranean markets, aimed at supply of our products to end users with high added value," said Lukoil president Vagit Alekperov.

Meanwhile in Russia, Lukoil announced it is considering a plan to build a $3 billion ethylene plant in the Stavropol Territory, the RIA Novosti News Agency reported.

The facility would manufacture ethylene products derived from hydrocarbons taken from the Caspian Sea.

If the company decides to move ahead with the project, construction is expected to take between four and five years.

The Russian government bonds due 2030 were better by 0.45 point to 112.45 bid, 112.60 offered.

Two benchmarks talked in primary

The primary market added momentum on the second strong day in equities.

OAO AK Transneft (A2/BBB+) issued talk for its two-tranche benchmark loan participation notes, which are expected to price on Thursday.

The five-year tranche was talked at mid-swaps plus 350 bps or about 7.8%.

The 10-year tranche was talked at mid-swaps plus 415 bps or about 8.9%.

Credit Suisse will act as bookrunner for the issue.

Proceeds will be used for investment projects and general corporate purposes.

Transneft is a Moscow-based gas pipeline operator.

The deal is expected at a total amount no lower than $1 billion, a market source said.

Also in the primary, Hong Kong & China Gas Co. Ltd. (A1/A+/) set a maturity of 10 years for its upcoming dollar-denominated benchmark-sized bonds.

HSBC and Morgan Stanley will manage the deal.

The proceeds will be used to refinance debt or for general corporate purposes.

Hong Kong & China Gas is a Hong Kong-based gas and utility company.

The deal was whispered to price at a spread of Treasuries plus 225 bps to 275 bps, a market source said.

The United Kingdom's REA Finance BV issued a prospectus ahead of a £15 million reopening of its 9½% notes as part of a £28 million issuance plan.

The £15 million tranche is expected at a cash price of 99.868.

Results of the sale will be announced on Aug. 21.

The notes are redeemable at par beginning on Dec. 31, 2015.

REA is a producer of Indonesian palm oil issuing through a financing vehicle in the Netherlands.

LatAm slow at month's end

Latin America traded slowly as the market neared month's end and traders were anxious to "close the books and make space on the balance sheet," a strategist said.

There was some short covering in Argentina, but little else bloomed on the radar, he said.

Also in Argentina, even after the government's farm tax proposal was defeated in the legislature, farming organizations accused the government of attempting to fracture the farm groups, according to the Buenos Aires Herald.

"We hope that [new agriculture secretary Carlos Cheppi] will invite the whole liaison committee as soon as possible," Luciano Miguens, head of the Argentine Rural Society (SRA), said in the report.

"Not to do so would be a mistake," he said, adding "There have been many efforts to divide us."

The 8.28% Argentine discount bonds due 2033 added 0.25 point to 77.75 bid, 78.25 offered.

Venezuela saw oil spike back over $127 per barrel as its 9¼% sovereign bonds due 2027 slipped 0.15 point to 91.5 bid, 92 offered.

In Brazil, the 7 1/8% government bonds due 2037 slid 0.15 point to 110.5 bid, 111 offered.

Elsewhere in Latin America, in Ecuador the U.S. Air Force and Navy will be asked to leave Manta air base when the lease expires in 2009, reports said.

The future status of the base has frequently been in doubt, but on Tuesday the Ecuadorian foreign ministry told the U.S. ambassador that the lease would not be renewed.

The draft constitution, which was approved by special committee on July 25, prevents the harboring of foreign militaries, but the draft still faces a national referendum on Sept. 28.

Also, many in Ecuador believe that operations conducted from the base have been in support of Colombia's fight against the Revolutionary Armed Forces of Colombia (FARC).

'Strong day' for Asia

Asia traded "kind of quiet again today," a trader said on Wednesday, but overall had a "strong day" with "very light customer flows."

From the externals, oil's jump knocked equities off from an early high at 11,565 points on the Dow Jones Industrial Average to 11,420, but even as oil stayed near its high, equities pulled back up to 11,583.

"That gave everyone a lot of confidence," he said.

In the Philippines, the central bank posted a prediction of July's inflation rate between 11% and 12% after registering a rate of 11.4% in June, the Manila Times reported.

"The forecast takes account of the impact of typhoons, somewhat higher prices for certain food items and the rise in oil and utilities prices during the month," said bank governor Amando Tetangco in the report.

At its current level, inflation is at a 14-year high and is well above the 7.6% target rate.

The bank is still predicting a peak at 12% in October followed by a deceleration into the end of the year.

The peso was seen trading at 44.265 to the dollar.

The Philippine government bonds due 2030 were better by 1.25 points to 127.75 bid.

In Indonesia, millions of low-income people are forced to go without even basic financial services, said president Susilo Bambang Yudhoyono, according to the Jakarta Post.

"Today, we have more than 50,000 micro-financing institutions, among the most in the world, yet some 40 million Indonesians are still lacking access to any of the services," he said in the report.

Late last year, Yudhoyono said that the government encouraged smaller lenders to offer loans to farmers, which would be up to 70% guaranteed by the government.

About $1.5 billion has been lent under the program.

Improving lending programs for the poor will help Asia fight through the crisis in commodity prices, said nobel laureate Muhammad Yunus.

The Indonesian sovereign bonds due 2017 took on 0.625 point to 99.625 bid.

Also in Asia, Pakistan was quoted better at 71.5 bid.

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