Emerging markets stronger; Argentina discount bonds pounded; primary market still lagging 2007 pace

By Aaron Hochman-Zimmerman

New York, Aug. 6 - Emerging markets took on modest gains on Wednesday, but investors still wondered when the market will settle down enough to allow for a free flowing new issue pipeline.

"Everybody is sitting on deals in their pipeline," a syndicate desk official said.

"We're just holding on, we're pitching everyday," he said.

There are deals waiting, even in Latin America, such as a $150 million bullet from Brazil's Camil Alimentos, but "the market just isn't there," he said.

In trading, flows were light, but most issues were able to tighten by a few basis points.

On the other hand, Argentina continued to take its beatings as its benchmark discount bonds due 2033 gave up 1.25 points.

Elsewhere, equities began the day lower but clawed upward to the positive side by the afternoon, which left volatility lower by 0.91 at 20.23, according to the VIX index. The index is a frequently used gauge of market volatility.

Argentina bleeds 25 bps

In Latin America, Argentina was ripped wider as the rest of the sector tightened in from 1 bps to 3 bps, a syndicate official said.

Argentina's five-year CDS was pulled as wide as 25 bps, but the reason was difficult to pinpoint, he said, although traders may be trying "to arb the basis swap between cash and CDS," he said.

Also in Argentina, after a two-hour meeting with the government, farm representatives called their discussion "timely" and "positive," according to the Buenos Aires Herald.

The government seemed to show a new motivation to solve the farm goods export tax crisis, the farm leaders said, according to the report.

Elsewhere, farmers praised vice president Julio Cobos, who was the only government official to attend the Rural Society Exhibition in Palermo, Argentina.

Many believe president Cristina Kirchner's use of the word "traitor" referred to Cobos, whose deciding vote killed the government's tax bill in the legislature on July 17.

The 8.28% Argentine discount bonds due 2033 sank 1.25 points to 72 bid.

Meanwhile, Kirchner cancelled a trip to Tarija, Bolivia, after volatile demonstrations over energy prices, which have resulted in the death of two miners.

Police tear gassed crowds, which successfully disrupted a planned meeting between Morales, Kirchner and Venezuela's president Hugo Chavez.

Latin America trades mixed

Outside of Argentina, cash prices were mixed and spreads were slightly tighter on what became a positive day in the U.S. market.

In Venezuela, the supreme court upheld a ban issued by Venezuelan comptroller general Clodosbaldo Russian, which will prevent nearly 270 people from running for state and municipal offices on Nov. 23.

The 9¼% Venezuelan sovereign bonds due 2027 were better by 0.1 point to 90.1 bid.

Elsewhere in Latin America, Brazil's highly traded 11% bonds due 2040 were up 0.125 point to 131.75 bid.

Mexico's 5 5/8% bonds due 2017 were lower by 0.3 point to 101 bid.

Colombia's 7 3/8% bonds also due 2017 were up 0.25 point to 108.25 bid, and Peru's 8 3/8% bonds due 2016 were down 0.4 point to 116.6 bid.

Asia firms, more rate hikes eyed

Asia kept its better tone and traded tighter on Wednesday as two of its major players, the Philippines and Indonesia, indicated that each expects more rate hikes.

In the Philippines, the central bank intends to remain with a policy of rate hikes as inflation hit a 16-year high in July at 12.2%, the Manila Times reported.

The July figure surpassed the bank's prediction of 11.2% to 12%.

Still, the bank's governor retained his positive long-term outlook.

"Inflation is expected to peak in the fourth quarter and then start moderating," said governor Amando Tetangco in the report.

The peso was seen trading at 43.65 to the dollar.

In Indonesia, the central bank's 25 bps rate increase to 9% on Tuesday will likely be followed by more increases, said Anton Gunawan, Bank Danamon chief of economists, according to the Jakarta Post.

Gunawan said rates will likely reach 9.5% by the end of the year after either one or two rate hikes.

Bank Indonesia may also require banks to hold larger minimum reserves to help bolster the rupiah, the report said.

The rupiah was seen trading at 9,073.00 to the dollar.

Emerging Europe narrows

Emerging Europe traded quietly but firmly on Wednesday.

In Russia, many of the major oil companies missed an Aug. 1 deadline to disclose information to the Federal Antimonopoly Service (FAS), the Itar-Tass News Agency reported.

The who's who of the country's biggest oil firms included Lukoil, Gazprom-Neft, TNK-BP Holdings and Rosneft.

Surgutneftegaz was able to meet the deadline.

The Russian government bonds due 2030 tacked on 0.25 point to 112 bid, 112.125 offered.

Also, a fire in Turkey's section of the Baku-Tbilisi-Ceyhan pipeline stopped the flow of gas beyond the Ceyhan terminal on Wednesday, Itar-Tass reported.

Meanwhile in Turkey, the number of foreign visitors to the country hit 3.3 million in June, up by 19.2% year over year, according to the Turkish Daily News.

Germany slightly edged Russia by sending 16.3% of Turkey's tourists compared to Russia's 16%.

The Turkish sovereign bonds due 2030 improved by 0.125 point to 149.875 bid, and the bonds due 2018 were up by 0.25 point to 99.25 bid, 99.875 offered.

Primary drags through summer

The primary suffered a difficult July, with a complete lack of sovereign issuance, a strategist said.

Lebanon's $500 million 8½% bonds broke through the slump on Aug. 1, but not before the lack of sovereign issuance left overall issuance lower by 60% at $16 billion.

Corporate issuance also fell 15.5% month on month in July.

So far in 2008, the surprise in the primary has been supplied by emerging Europe, particularly in the Commonwealth of Independent States.

The sector has priced about $29 billion, which already matches 94% of the strategist's issuance target for the year, he said.

The sector is down 47% from its 2007 levels, but Latin America has issued 78% less, the Middle East and Africa have issued 71% less and Asia has issued 73% less, he said.

Alfa Bank Ukraine (Ba3/B+) provided the most recent action from the CIS as it priced $250 million 12% three-year notes at par on Tuesday.

The bonds moved up by 0.25 point on Wednesday to 100.25 bid, 100.75 offered.

"We're way behind last year," a syndicate official said about issuance volume.

"Emerging Europe is on fire," he said. "It's having a bang up year," but when in Latin America, where financing continues to be available through other means, especially in the local markets, issuers are silent, he said.

"Why mess up your benchmarks?" he asked, by "setting a really lame benchmark in your market."

Most of Latin America is not desperate, he said.

Issuers are "refusing to pay up into a crappy market," he said, adding: "Why bother?"

"All the stuff that is getting done is getting done privately," he said, and almost heavily in dollars.

"Dollars are cheap," he said.

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