Emerging markets mixed; Russia ignores world's censure; sell strategy eyed ahead of new issues

By Aaron Hochman-Zimmerman

New York, Aug. 20 - Emerging market bond trading finished mixed on Wednesday with strength in emerging Europe balancing weakness in Latin America and Asia.

Russia's credit continued to feel unaffected by the invasion of Georgia or the international community's reaction to it.

World leaders continued to call for a genuine and large-scale Russian withdrawal from Georgia but as of yet have stopped short of significant economic or political sanctions.

In the primary, the pipeline remained dust dry, but investors discussed a strategy of broad selling ahead of the anticipated September resupply in order to take advantage of the high yields that are expected.

Meanwhile, a rollercoaster day for equities still allowed volatility to drop by 0.86 to 20.42, according to the VIX index. The index is a frequently used gauge of market volatility.

Low volumes in weaker LatAm

Latin America stepped back on Wednesday as the desks were quiet during another August day of trading.

In Venezuela, the benchmark credit took a step back on Wednesday but has generally outperformed the market over the week.

"People are expecting perhaps a buyback," a syndicate official said, guessing at what may have encouraged investors.

The 9¼% Venezuelan government bonds due 2027 gave up 0.3 point to 91 bid.

Meanwhile in Argentina, the arguments between the heads of the farm organizations continued on Wednesday.

"That's a return to the way things always were," a strategist said.

The large-scale strikes took a great deal of cooperation between the groups, but whether or not the bickering continues, "I don't think that there'll be another strike," the strategist said.

The 8.28% Argentine discount bonds due 2033 dropped 0.25 point to 73 bid.

Also in Latin America, Brazil has been "doing relatively well" considering recent losses in the Bovespa, the syndicate official said.

However, Brazil "is a total commodity play," he said, and "oil made some gains today."

Light sweet crude was seen trading at more than $115 per barrel.

The 7 1/8% Brazilian sovereigns due 2037 slipped 0.25 point to 110.9 bid.

LatAm ponders primary

In corporates, trading has also ground to a snail's pace.

As investors wait for action in the primary to spur on trading, some have proposed selling virtually all emerging market holdings.

"It depends," said a strategist, who noted that there is a lot of disagreement over the selling strategy.

"It would actually make sense," said a syndicate official. "There's a lot of cash on hand in the funds and they need to put that money to work."

The argument for selling also hinges on the idea that "we actually see supply," the strategist said.

The syndicate official was more confident in the pipeline's future productivity, noting a strong spate of issuance in autumn of 2007.

Also, in Latin America "we haven't seen the new issue premiums that we did out of Eastern Europe," the strategist said.

"In May, when there was some issuance, the Russians were paying a lot and the Brazilians weren't."

Much of the success of the primary in the coming months will be factored against the strength of the dollar and commodities.

Emerging Europe inches up

Emerging Europe was slightly firmer to flat on quiet summer trading.

In Russia, tensions continued on Wednesday, heightened by a ceremony in Warsaw, Poland, which finalized permission for the United States to place defensive missiles in the former communist bloc country.

The United States and NATO also kept pressure on Russia to abide by the terms of the ceasefire by removing its troops from Georgia.

Russia did clear the port city of Poti to U.S. aid as NATO hopeful Ukraine announced it will allow the Russian navy to use its port facilities in Sevastopol.

Western leaders are still grappling over how to handle diplomacy toward Russia going forward.

The United States stopped short of calling for Russia's removal from the G-8, or group of eight developed economies. However, meetings of the economic bloc will be suspended until further notice.

Meanwhile, adding to the uproar, the Georgian breakaway republic of Abkhazia asked Russia to recognize its independence, according to the Itar-Tass News Agency.

The region's parliament approved the push for independence on Wednesday.

Still, the effects of the Russian invasion and the west's reaction to it continued to have little influence over Russian credit.

The Russian government bonds due 2030 added 0.25 point to 111.75 bid.

Southwest from Georgia, oil supplies will again reach Turkey through the strategic Baku-Tbilisi-Ceyhan pipeline.

Pipeline operations were suspended by the United Kingdom's BP plc during hostilities in and around Tbilisi.

Also in Turkey, a new round of incentives for small businesses may be instituted in 2009, the Turkish Daily News reported.

Among the incentives are a 5% payroll tax cut as well as government assistance for job training programs, borrowing and investments.

The Turkish sovereign bonds due 2030 took on 0.25 point to 149.875 bid.

Georgia raises rates

As additional fallout from the Russian invasion, Georgia's central bank cut its key policy rate, the one-week certificate of deposit rate, by 1% to 11%, according to a press release.

The bank noted that a greater degree of liquidity will be needed in order to begin to rebuild after the attacks.

It also conceded a "possible slowdown in economic activity that has resulted from the recent military operations within the nation."

"The worsening investment climate will likely lead to a certain slowdown in capital inflows for the remainder of the year. Also, growth rates in monetary aggregates will continue to slow down," the bank said.

Still, the bank touted the country's financial stability throughout the difficult time.

"It must be mentioned that the banking system has demonstrated resilience and robustness toward the recent crisis," the bank said in a memo accompanying the rate reduction.

The rate cut was approved with an eye to reaching an inflation goal of 8% by the end of the year.

The lari was seen trading at 1.406 to the dollar.

Asia wider, slight trading

In Asia, investors spent another day with more energy spent on the Olympics than trading.

"Equities were a little firmer; credit was a little wider," a trader said, but generally, "nothing happened."

In the Philippines, the Treasury Department reported a PHP 33.4 billion deficit through July compared to PHP 39.4 billion during the same period of 2007, according to a press release.

Revenue collections for July were up 9% compared to July 2007 at PHP 101.4 billion, which left the July deficit at PHP 15.4 billion.

Through the first seven months of 2008, the government has spent PHP 704.8 billion, or 7.8% higher than in the same period of 2007.

The peso was seen trading at 45.72 to the dollar.

In Indonesia, the government-run energy firm PT Perusahaan Listrik Negara (PLN) is looking to add to its stock of coal mines.

To keep its power plants in operation it is in discussions with 15 mining companies, the Jakarta Post reported.

PLN is the largest Indonesian consumer of coal, the report said.

The company expects to burn through 34 million tons in 2008, but plans to increase usage to 43 million tons in 2009 and 82 million tons in 2010.

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