Emerging markets mixed; Pakistan sells on Musharraf resignation; primary quiet, waits for September

By Aaron Hochman-Zimmerman

New York, Aug. 18 - Emerging markets traded very lightly but succumbed to equity influence late in the session.

The resignation of Pakistan's president Pervez Musharraf dominated the headlines after he announced he will leave office, while some investors took the chance to jettison risk from what has been a generally illiquid credit.

Illiquidity has prevailed over the market sectors throughout recent sessions as the people who are not on vacation waited another day for September, which is expected to bring with it a harvest of new offerings.

Until then, some have suggested investors free up capital in order to put it into the new paper, which many believe will come cheaper than what is available.

Elsewhere in the broader market, a severely dented equity market pushed volatility above 20.00 as it ended higher by 1.40 at 20.98, according to the VIX index. The index is a common measure of market volatility.

'Sell' all emerging markets

"We actually believe you should sell all emerging markets," a trader said.

Once the pipeline reopens, likely in September, "the first [new issue] will be expensive, then cheaper and cheaper," he said.

At the moment, the primary market is completely silent except for a rare rumor, including one about a short-term issue from Russian Standard Bank, he said.

"Everyone is coming back from holiday and waiting for September," he said.

The investors who are still at their desks are "afraid to buy," he said.

The market knows that the issues that will hit the market in the coming weeks and months will be cheaper than what is now on the trading block.

"Well, it's on a case by case basis," a syndicate desk official said about the wholesale selling strategy.

Still, "it sounds simplistic, but there's a lot of truth behind that," he said.

"When the new issues come in our market, it should have some sort of a repricing effect across the board," he added.

The wisdom of large-scale selling has not taken hold everywhere.

"We haven't seen that entirely manifest itself," a trader said, although "people make that argument based on the strength of the dollar."

Musharraf resigns

Elsewhere in Pakistan, president Musharraf resigned in the face of impeachment charges from the opposition in parliament.

"We definitely saw some movement on Musharraf," the trader said.

"We saw it trade both ways," he said, but the sellers prevailed as investors took the opportunity to run from the risk.

Politically, the world put the unfolding situation in a renewed focus as the nuclear power continues to battle militancy and instability.

Since the beginning of the global war on terror operations in Afghanistan, Pakistan has become a key ally to the West in the war on terror with Musharraf drawing much of his external support from president George Bush.

The Pakistani sovereign bonds due 2017 were seen at 68 bid, 70 offered.

Asia loses early gains

Asian trading started the morning tighter, but became hitched to flailing equities throughout the afternoon, a trader said.

Still, credit traded at an unmistakably August-like pace, he said.

Meanwhile in the Philippines, in a bid to boost revenues, the Finance Department has ordered the Bureau of Internal Revenue to track down the country's major tax evaders.

In the first half, the revenue service collected PHP 191.3 billion, compared to PHP 164.6 billion during the same period last year, according to the Manila Times.

Those considered large taxpayers accounted for 50% of the bureau's collection target of PHP 845 billion.

The Philippine government bonds due 2030 were seen at 128.5 bid, 128.75 offered.

Also in Indonesia, the government plans to expand the types of businesses that will be subject to new taxes, the Jakarta Post reported.

The government is eying the palm oil, coal, construction, real estate, pulp and paper, consumer finance, retail, and port services as some of the new taxable sectors.

"We will count on more business sectors, especially those that will experience a boom next year," said director general of taxation Darmin Nasution in the report.

Taxes are expected to fill 70% of the government's budget in 2009 by collecting 726.3 trillion rupiah. A draw of 641 trillion rupiah is forecast for 2008.

The Indonesian sovereigns due 2017 were spotted at 100 bid, 100.5 offered.

Emerging Europe waits for primary

Emerging Europe traded very quietly to open the week in the heart of August's dog days.

"People are just waiting for new issues," a trader said, expecting renewed vigor in September.

Meanwhile in Georgia, Russia began its pullout in accordance with a ceasefire brokered by French and E.U. president Nicolas Sarkozy.

Russia only removed some of the troops from the former Soviet republic of Georgia and insisted that it needs to keep a peacekeeping force between the capital Tbilisi and the breakaway South Ossetia.

In recent days, tensions have eased in the region, but there is still doubt over the future status of South Ossetia and the Russian presence.

"If anyone tries this again, we will come out with a crushing response," president Dmitry Medvedev said, according to reports, about those who would harm Russian citizens or Russian nationals.

The western powers continue to lobby Russia to remove all of its troops and agree to a permanent solution to the conflict in the strategic Caucasus region.

Strictly in the credit market, neither the beginning nor the potential end of the crisis did much to move Russia's global paper.

The Russian government bonds due 2030 were quoted at 112.05 bid, 112.2 offered.

Turkey on shaky ground

In Turkey, a report found that nearly all of the country's industrial infrastructure and dams are in "high-risk" earthquake zones, according to the Turkish Daily News.

A similar quake to the 1999 disaster, which killed nearly 20,000 people and registered 7.4 on the Richter scale, could occur within 30 years, the report said.

The World Bank estimated the cost of the earthquake between $12 billion and $15 billion.

The Turkish sovereign bonds due 2030 were seen at 150.55 bid, 151.05 offered.

LatAm coasts on shallow volume

Trading in Latin America was also condensed by the summer heat.

The highly traded issues were generally flat.

"Latin America looks extremely rich right now," a syndicate desk official said, adding it is "too rich versus U.S. high grade."

Brazil's 7 1/8% sovereigns due 2037 were quoted at 111.25 bid.

Also, Venezuela's 9¼% government bonds due 2027 were spotted at 90.25 bid.

It's a walkout

In Argentina, farmers will again hold roadside demonstrations after the government failed to adequately respond to their demands, according to the Buenos Aires Herald.

Vice president Julio Cobos said he was "sorry" that the protests will resume, according to the report.

Cobos' decisive July 17 vote in the Senate killed the government's attempt to finalize a tax increase on farm products.

Some believe Cobos was the target of the word "traitor," which president Cristina Kirchner used in a speech about the government's attempt to push the tax through the legislature.

"That one's never over, I think," the syndicate official said about the back and forth between the government and farmers.

The 8.28% Argentine discount bonds due 2033 were seen at 73.5 bid.

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