Emerging markets slower, lower; Venezuela leads high-betas; investors hopeful for primary rebound

By Aaron Hochman-Zimmerman

New York, Aug. 19 - Emerging markets dipped lower on another session of slow summer volumes.

Still, long-term outlooks remained positive in many corners of the market.

Once the summer holiday season ends there will be a resurgence in the primary, a strategist said, with "more [new issues] coming up out of eastern Europe, even Latin America."

"Things are brewing," he said.

For many, until the brew is finished cooking, the secondary will remain slow as well.

On Tuesday, Venezuela managed to eek out the lead among the highly watched credits by adding 1.05 points to its bonds due 2027.

Meanwhile, equities suffered another pounding on Tuesday, but volatility was up only 0.30 to 21.28, according to the VIX index. The index is a standard yardstick of market volatility.

As a sector emerging markets held unchanged at 303 basis points, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm still strong long term

Latin American trading slipped on Tuesday, but kept a long-term positive outlook, a strategist said.

"I think the market is in good shape," he said.

"Investors have come out in the last few sessions and put money to work," he said, mostly in the "low-risk, high-grade types of securities."

"We have widened," he said. "Spreads are cheaper relative to the U.S. Treasury market."

Still, "outright purchases have been positive," he added.

Meanwhile, reports came from Argentina that infighting has become more prevalent between the leaders of the farming organizations.

"As the strikes continue, it's going to have an effect on the credit," a strategist said, and "Argentina is already very wide."

The 8.28% Argentine discount bonds due 2033 slipped 0.25 point to 73.25 bid, 73.75 offered.

In Venezuela, president Hugo Chavez ordered the seizure of facilities that formerly belonged to Mexico's cement producer Cemex SAB.

"PDVSA will proceed to take operational control of the plants of Cemex Venezuela on Monday, Aug. 18, 2008, on behalf of the Government of Venezuela," Cemex said in a press release Monday night.

Still, the company is pressing Caracas for a buyout price of $1.2 billion. Officials reportedly scoffed at the figure.

A final arrangement is still forthcoming, but "they're buying it," rather than taking it outright, a strategist said about Venezuela.

Nevertheless, "it just adds to the negativity for the credit," he said, but "it's not something that is, from a market perspective, Earth shattering."

The 9¼% Venezuelan government bonds due 2027 took on 1.05 points to 91.3 bid, 91.7 offered.

Also, Brazil's 7 1/8% bonds due 2037 fell 0.4 point to 110.85 bid, 111.15 offered.

Emerging Europe weaker

Emerging Europe softened on Tuesday as the tone turned sour on the second straight day of an equity slide.

The market reaction to the conflict in the Caucasus has been relatively contained, but "spreads in emerging Europe have widened and people are concerned about that," a strategist said.

In Russia, leaders were told that NATO will no longer conduct "business as usual" with their former Cold War adversary.

NATO leaders met in Brussels to discuss how they would proceed after Russia invaded and continues to occupy parts of Georgia.

The leaders admonished Russia's behavior, but almost nothing came from the western powers.

For its part, Ukraine, which has been internally grappling with its move toward the West, hit back against the Russian invasion of Georgia by allowing western missile defense systems on its installations.

Russia has long opposed the NATO anti-missile systems in former Warsaw Pact countries such as Poland and the Czech Republic. Missiles and guidance systems in the Ukraine would be the first based in a former Soviet republic.

Ukraine has also recently placed restrictions on the Russian navy, which uses Ukrainian Black Sea ports in the Crimea.

The Russian sovereigns due 2030 fell 0.55 point to 111.5 bid, 111.75 offered.

Georgia leaves CIS

Georgia, which is still the unwilling host of Russian troops, has completed its own withdrawal from the Commonwealth of Independent States.

The political cooperative was formed between the former Soviet republics after the break up of the USSR.

"This decision will have negative consequences, above all, for Georgia and its citizens," chairman of the CIS executive committee Sergei Lebedev told the Itar-Tass News Agency.

"That country remains connected to the other CIS countries by thousands of threads in the economic and humanitarian fields," Lebedev said.

Turkey, Iran to sign gas agreement

In Turkey, after the visit of Iran's president Mahmoud Ahmadinejad to Istanbul, Turkey's energy minister Hilmi Guler announced that he will travel to Tehran to finalize a deal to invest in Iranian gas fields, according to the Turkish Daily News.

The United States voiced objections over a NATO ally moving closer to Iran, but the Turkish government remained defiant.

"Turkey is a country dependent on natural gas; we protect our interests here. We have to make the relevant investments," Guler said in the report.

"There are no simple solutions to difficult questions, but our priority is security of energy supply," he added.

The energy minister also told reporters that no espionage or damage was detected on the Baku-Tbilisi-Ceyhan pipeline and normal operation should resume within days.

The Turkish government bonds due 2030 sank 0.9 point to 149.625 bid, 150.25 offered.

Quiet Asia trades flat

Asian trading was slow to wake after days off for the markets in the Philippines and Indonesia on Monday.

In the light trading that did occur, credit followed equity indices on summertime flows.

In the Philippines, the country's prospects for economic growth were dialed back by the Development and Budget Coordinating Committee, the Manila Times reported.

The GDP projection was trimmed to between 5.5% and 6.4% from between 5.7% to 6.5%.

Hard times for the global economy contributed to the less ambitious target as well as the Philippines' galloping inflation, the report said.

The peso was seen trading at 45.575 to the dollar.

The Philippine government bonds due 2030 were lower by 0.5 point at 128 bid, 128.5 offered.

In Indonesia, the government announced it will debut PT Agro Kimia Indonesia, a holding company that will manage state-owned fertilizer and cement companies, according to the Jakarta Post.

After two years of delays, "the official announcement will be made next week," said secretary for state minister of state enterprise Said Didu.

"The aim of the holding company is to open wider access for state firms to raise funds for expansion and to boost coordination between state firms in the same sector," said Said.

The new holding company will replace PT Pupuk Sriwijaya, which acted inefficiently, Said said in the report.

The new company is only the beginning of a series of holding companies that will control the government's interests in mining, agriculture and banking.

The financial holding company is expected in 2010.

The Indonesian sovereign bonds due 2017 were unchanged at 100 bid, 101 offered.

Pakistan holding steady

Also in Asia, in the wake of the resignation of Pakistan president Pervez Musharraf, uncertainty has taken hold of the local market.

"The news is obviously negative," a trader said about Musharraf, but "the players in New York have rubbed it off of their shoulders" as Pakistani credit trades unchanged to "a bit wider."

The rupee was seen trading at 74.195 to the dollar.

The Pakistani government bonds due 2017 slipped 1 point to 67 bid, 69 offered.

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