Emerging markets mixed; Turkey stronger as Georgia, Russia fighting subsides; primary market hushed

By Aaron Hochman-Zimmerman

New York, Aug. 12 - Emerging market bonds went largely unchanged on Tuesday as equities left the credit market with a lack of leadership.

"We're kind of stuck in the water," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"[Oil] and the dollar are the only markets making any money," he said, based on their volatility.

"We're just going to wait to see what the global economic environment is going to evolve into," he said.

Emerging market trading has seen a lack of movement in recent sessions with the exception of credits such as Argentina, which battled higher on Tuesday after it was downgraded by Standard & Poor's on Monday.

The benchmark discount bonds due 2033 added 0.5 point.

Meanwhile, it was Turkey that saw the biggest gains during the session as it seemed that the conflict in the Caucasus was ready to subside without a severe impact on oil prices, or Turkey's neighbor and trading partner Georgia.

Turkey added 1.25 points to its benchmark bonds due 2030.

In the primary market, issuers scattered as soon as the lights came on as no one seemed ready to set sail into the summer doldrums.

In the broader market, the sell-off in equities left volatility climbing throughout the session. The VIX index ended higher by 1.05 at 21.17. The index is a frequently used yardstick of market volatility.

Stocks fell and sent investors to Treasuries, which pulled emerging markets wider by 7 basis points to a spread of 294 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Emerging Europe surviving

In Georgia, Russia ended its military operation saying "the goal has been attained," president Dmitry Medvedev said in a statement.

The Russian military began the operation on Thursday claiming its purpose was to guarantee the rights of Georgia's breakaway province of South Ossetia, but the operation expanded into another breakaway region, Abkhazia, as well as sovereign Georgia.

Bombs fell around the Georgian cities of Senaki, Gori and the capital Tbilisi, which is a hub of the Baku-Tbilisi-Ceyhan pipeline.

No damage to the pipeline was reported, but the United Kingdom's global energy giant BP shutdown two of the three pipelines in Georgia as a safety precaution.

The Russian sovereigns due 2030 added 0.4 point to 112.25 bid, 112.375 offered.

Light sweet crude was seen trading lower by $1.40 per barrel at close to $113 per barrel.

Since the invasion last Friday, the Georgian bonds due 2013 have plummeted 7.7 points to 88.3 bid.

In Turkey, business interests are concerned that a prolonged conflict between two of its major trading partners will soon take a toll on its economy, according to the Turkish Daily News.

Almost 100 Turkish companies do about $600 million worth of business in Georgia while $400 million of Turkey's exports travel to Azerbaijan through Georgia.

Still, Russia is Turkey's largest trading partner at $28 billion in total volume during 2007. Russian natural gas represented $18 billion of Turkey's imports.

The two have already reached a volume of $12.75 billion in 2008.

The Turkish sovereign bonds due 2030 were up 1.15 points to 150.15 bid, 150.65 offered.

Also in the emerging European time zone, Lebanon's government won a confidence vote in the parliament only 11 days since pricing its $500 million 8½% sovereign.

The ruling coalition is a combination of pro-Western parties and former opposition groups affiliated with Hezbollah.

Argentina creeps higher, LatAm mixed

Latin America kept its eyes on the major markets once again as Argentina continued a modest gain, even in the first full day after its downgrade to B from B+ by S&P.

"It hasn't advanced a whole lot," said IDEAglobal's Alvarez, adding that despite some success for the global issues, "the local instruments are beginning to decline."

The downgrade forced the government to turn back to what inspired Monday's big rally, the announcement of a big bond buyback.

"Considering the downgrade, they had to hurry up and press a new statement," Alvarez said.

The government announced another buyback but again left the announcement short of specifics.

Even if the buyback is forced, it still saved the credit from dropping on the downgrade.

The 8.28% Argentine discount bonds due 2033 improved by 0.5 point to 72.5 bid.

Venezuela's bonds slipped slightly on the action in the oil market, which seems to have turned on its head, now having no bottom in sight.

The Argentine bonds that Venezuela holds buoyed its own bonds on Monday, but Tuesday's drop "is a direct result of oil," Alvarez said, as even a war in the Caucuses could not drive up crude prices.

The 9¼% Venezuelan sovereign bonds due 2027 dropped 0.4 point to 88.1 bid.

Meanwhile, Brazil's 7 1/8% bonds due 2037 added 0.35 point to 111.25 bid, 112 offered.

Also in Latin America, Colombia's president Alvaro Uribe now has 5 million signatures worth of support to amend the constitution in order to allow him a third term in office beginning in 2010.

Whether or not Uribe will choose to stay in office is still unknown, but what effect it will have on the market is still not yet clear.

Still, the announcement of the results of the petition "doesn't mean anything," Alvarez said.

"It didn't filter into prices," he added.

The Colombian government 8 1/8% bonds due 2024 slipped just 0.05 point to 116.2 bid.

Asia trades lightly

"Definitely the summer trading patterns are in," a trader said, "volatility has dropped out quite a bit."

Still, "the tone to the market is holding OK," he said as the market watchers have seen swings of 1% to 2% each day and have become "immunized to volatility in stocks."

"Until we get supply ... it's not going to be tested," he said, and "we're going to be rangebound for the rest of the summer."

No serious deliveries of new supply seem to be on the horizon, he said, until "stocks break out" or the market provides a very stable platform for nearly a week.

"It just doesn't seem as though we're capable of it," he said.

In the Philippines, the government added to its domestic debt as it sold nearly PHP 50 million in new debt in May, according to the Manila Times.

The total debt now stands at PHP 3.9 trillion, or 2.8% higher than after the first five months of 2007.

At the end of May, the debt balance was split between 58% owed domestically and 42% owed to foreign investors.

The Philippine government bonds due 2030 held unchanged at 128 bid, 128.5 offered.

In Indonesia, the government announced that it has budgeted a 19 trillion rupiah three-year infrastructure investment in the national railroad operator PT Kereta Api Indonesia.

"The government is very serious about revitalizing the rail service. Rail is among the country's main transportation arteries and should be nurtured," said the state minister for state enterprises, Sofyan Djalil, according to the Jakarta Post.

Sofyan said he hopes more industrial materials, such as cement and coal, can be transported by rail, rather than by roadway, the report said.

Currently only 0.6% of goods are transported by train, 90% are transported by truck.

The Indonesian sovereign bonds due 2017 took on another 0.25 point to 100 bid, 100.5 offered.

Pakistan was hardly traded, once again, as the specter of impeachment hangs over the head of president Pervez Musharraf.

"It's a crisis with no trading and no liquidity," the trader said.

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