Emerging markets mixed; Venezuela leads high-beta credits with modest bond gain; primary napping

By Aaron Hochman-Zimmerman

New York, Aug. 21 - Emerging market bond trading ended Thursday mixed after stronger results in emerging Europe balanced out weakness in Asia.

Latin America fell in the middle of the spectrum, but every sector saw very light flows, which are expected to continue through the Labor Day holiday in the United States.

"Markets are very, very light," a market source said.

However, "we've seen better selling" and "good cash coming in," he said. "It's a give and take."

Oil's $5-per-barrel jump was a headline item on Thursday but had little immediate effect on equities or credit.

The commodities market is a place to watch, the source said, noting "high oil prices will bring higher inflation."

In trading, oil producer Venezuela led the high-beta credits with a modest gain of 0.5 point for its benchmark bonds due 2027.

The primary was, once again, silent.

In the broader market, equities clawed higher as volatility dropped by 0.6 to 19.82, according to the VIX index. The index is a standard measure of market volatility.

LatAm mixed over low flow

In Latin America, "it's been fairly quiet," although some news floated over the wire, but "it doesn't seem like it is market moving," a strategist said.

"Bonds in general have been weakening in the last couple sessions," he said.

Especially in Latin America, "people are concerned with what is happening in the commodities market," he said.

In Argentina, the government took a step to appease the farmers by offering aid to the victims of a drought, which hurt farm earnings and caused the death of about 700,000 head of cattle, the Buenos Aires Herald reported.

The farmers were believed to be planning a possible new moratorium on grain sales when the government announced the aid package.

"It would seem to be rather hasty to threaten new strikes when we are doing good work, trying to draw up a proposal that we can achieve consensus on," said agriculture secretary Carlos Cheppi.

The 8.28% Argentine discount bonds due 2033 inched up by just 0.1 point to 73.1 bid, 73.5 offered.

In Venezuela, Mexico's Cemex SAB announced late Wednesday that it will try to block Caracas' nationalization of its assets.

"Cemex believes the confiscation and subsequent start of the expropriation process is a flagrant violation of the constitution, law of expropriation and other laws of Venezuela," the company said in a press release.

Also in the release, Cemex announced that it cannot accept the price Venezuela hoped to pay for the facilities.

"Cemex determined that it could not accept the compensation proposal offered by the government of Venezuela as part of its ongoing process to nationalize its assets. Cemex believes that the offer of $650 million significantly undervalues its business in Venezuela," the release continued.

The Mexican cement producer is expecting a figure close to double what was offered.

The 9¼% Venezuelan government bonds due 2027 tacked on 0.5 point to 91.5 bid, 92 offered.

In Brazil, the 7 1/8% bonds due 2037 slipped 0.25 point to 110.65 bid, 111.25 offered.

Emerging Europe beats headlines

Emerging Europe was able to advance amid slow trading on Thursday; however, the sector provided many of the day's negative headlines, which some believe were beginning to catch up to the market.

In Russia, prime minister Vladimir Putin said the inflation rate of the ruble is still "impermissibly high," according to the Itar-Tass News Agency.

The ruble was seen trading at 24.286 to the dollar.

Meanwhile, Georgia threatened a campaign of "passive resistance and peaceful protest actions," the Associated Press reported on Thursday.

Georgia president Mikhail Saakashvili noted that the Russian presence is shrinking in size but is moving to take new strategic ground in the country.

Elsewhere in Georgia, leaders of South Ossetia joined fellow breakaway leaders in Abkhazia in their plea to Russia to recognize the regions as independent states.

Russia supports the broad interest of the regions, which have large ethnically Russian populations, but it has not indicated if it will support full independence.

Pressure on Russia from the west began to take a toll on oil prices on Thursday, according to some.

Strong words from the west were directed at Russia, but the most stinging of reactions to the invasion of Georgia is the conclusion of talks, which will place defensive missiles in Poland.

"Somebody had to find an excuse" for the rising oil prices, a strategist said, explaining away why only recently the Caucasus conflict is perceived to have an influence on oil.

Still, "the Russian situation is very problematic to the market," he said.

When asked if he believes Russia will be removed from the G-8, he said: "They will have to."

"I don't see how you invade another free country and can remain in the G-8," he said.

Some draw parallels between the Russian invasion of Georgia and the United States' invasion of Iraq, but "there was no U.N. mandate," the strategist said about the Russian actions.

Light sweet crude was seen trading as high as $122 per barrel.

The Russian sovereign bonds due 2030 were better by 0.25 point to 112 bid, 112.25 offered.

Elsewhere in Turkey, the financial sector's coffers have grown by 21% as of March to 844.6 billion lira, the Turkish Daily News reported.

Loans from Turkish banks also grew to 320.4 billion lira, or a 12.2% increase compared to the first quarter of 2007.

Banks' profits were also up in the first quarter.

Turkish banks hauled in 3.9 billion lira, or 14.4% more than the same period of 2007.

The Turkish government bonds due 2030 added 0.125 point to 150 bid, 150.25 offered.

Asia 'dead'

"'Dead' is the only one word," a trader said of Asia as the sector slowly drifted wider.

"There was a weak undertone again," he added, but "no real drastic movement."

Oil prices were the biggest catalyst of the day, but "it hasn't really affected equities that much," he said.

"[Oil] was really a second-quarter story," he said.

No serious trends will likely develop in the market until after Labor Day in the United States, he said.

In Indonesia, the country's biggest steel producers hope to boost output over the next three months in order to balance an expected slowdown during the Muslim fasting month of Ramadan, according to the Jakarta Post.

"The domestic market slows down during the three-month period as the country is welcoming the fasting month and Idul Fitri," PT Krakatau Steel marketing director Irvan Hakim said, according to the report.

Still, Indonesian trades largely "in sync with Philippine CDS," the trader said.

The Indonesian government bonds due 2017 were spotted at 99.625 bid, 100.625 offered.

Meanwhile, the Philippines sovereigns due 2030 were quoted at 127 bid, 128 offered.

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