Emerging markets pulled lower; high-betas lead retreat; Turkey benchmark off 1 point; primary calm

By Aaron Hochman-Zimmerman

New York, Sept. 5 - Emerging markets weakened even as equities were able to rally back from the effects of the poor economic news at the start of the day.

Trading went on against the backdrop of the report of a 6.1% unemployment rate in August published by the U.S. Bureau of Labor Statistics.

Many emerging market issues were able to hold flat, but it was Turkey's benchmark bonds due 2030 that were the hardest hit as they shed 1 point.

Elsewhere, many of the high-beta names in Latin America and Asia took lighter losses.

In the primary, new issue rumors followed big name Latin American issuers such as Brazil's Braskem SA, but nothing serious materialized and the primary faded off into the weekend.

New issues will continue to be a difficult proposition, said a strategist, as emerging market credits have lost $4.3 billion in outflows year to date.

The figure represents about 11% of assets under management, he said.

"Investors have been wanting to hold onto their cash," he added.

Meanwhile in the major markets, equities' late rally served to cut volatility by 0.97 to 23.06, according to the VIX index. The index is a frequently used yardstick of market volatility.

Treasuries may have moved spreads wider, close to a three-year high in early trading, but as yields on the 10-year U.S. Treasury began to climb, emerging markets spreads continued with genuine widening, the strategist said. The EMBI+ index widened 3 basis points to a spread of 324 bps. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was also wider by 3 bps with a spread of 354 bps.

The diversified index has a less strict liquidity rule for inclusion.

Russia drags down emerging Europe

Emerging European credits continued to follow Russia lower, with the exception of some of the higher-rated names like Hungary.

The talk of serious repercussions following Russia's invasion of Georgia have all but subsided; however, outflows of investment capital have smashed the ruble.

"That's all just talk; there's no way they'll actually do that," a strategist said about the possibility of removing Russia from the economic block, G-8 or similar sanctions.

"The more concerning issue is the capital outflows," which have "put the currency under severe pressure," he said.

Also in Russia, military flights and nuclear submarine movements have caught the attention of the Japanese defense forces, according to the Japanese annual defense white paper, the BBC reported.

Recently, Russian military activity has increased in frequency and proximity to Japan, the report said.

The former enemies never formally declared an end to hostilities at the conclusion of World War II.

The ruble was seen trading at 25.496 to the dollar.

The Russian government bonds due 2030 dropped 0.25 point to 110.45 bid, 110.75 offered.

In Ukraine, during a meeting with U.S. vice president Dick Cheney, president Viktor Yushchenko thanked the United States for its support during the recent tensions involving Russia and Georgia.

"We appreciate greatly our strategic bilateral relations," Yushchenko told Cheney, according to the Ukrainian president's official web site.

Yushchenko also noted the similar positions the two countries have taken over the recent conflict.

"On most of positions, including on Georgia, we have understanding with the U.S.A. and the E.U.," he said.

Still, "I don't think Ukraine will move very far to the West," the strategist said.

"Half of the country is aligned with Russia" and "they will not that easily be allowed into the E.U. or NATO," he said.

Also in Turkey, the new sovereign widened, but remained generally stable in cash terms, inching up 0.25 point, a syndicate official said.

The new Turkish 7% bonds due 2019 were quoted at 99.65 bid.

Meanwhile, the benchmark Turkish issue due 2030 fell 1 point to 149.5 bid.

LatAm ends ugly week

Latin America traded slowly on Friday after taking a pounding over the course of the week, a syndicate official said.

Some credits were able to hold their value; others slipped slightly amid more sour news from the major markets.

The emerging equity markets suffered all week along with commodities, he said, but Brazil's Bovespa showed resiliency on Friday as it "actually rebounded to only borderline down," he said.

Still, for the week CDS spreads were largely wider by up to 40 bps to 50 bps, he said.

In Venezuela, president Hugo Chavez praised a new law allowing for the nationalization of oil transport firms.

The companies, which acted as intermediaries in the oil production pipeline, profited at the expense of the Venezuelan population, he said.

The Venezuelan 9¼% sovereign bonds due 2027 fell 0.35 point to 90.15 bid.

Elsewhere, while Brazil remained silent over the question of joining OPEC, the 11% Brazilian sovereigns due 2040 were seen at 131.85 bid.

Meanwhile, high-grade credits such as Mexico continued to slightly outperform, although the benchmark 5.625% bonds due 2017 were flat at 101.6 bid, 101.75 offered.

Tempers, fires flare in Argentina

In Argentina, Buenos Aires was burning on Friday, or at least some of its commuter train stations.

Protestors, who are believed to be members of the militant Workers Party, allegedly set fire to trains at the Merlo and Castelar stations in suburban Buenos Aires.

Police were called to break up the demonstrations.

Justice minister Anibal Fernandez called the fires "premeditated" acts of "sabotage."

The 8.28% Argentine discount bonds due 2033 were unchanged at 71.75 bid.

Asia loses lead

As a sector, Asia had remained slightly ahead of the other emerging market sectors for most of the past week, but price action began to mirror the other sectors more closely on Friday.

In Indonesia, a severe drop in domestic realized investment during the first half of 2008 can be attributed to an "uncompetitive" tax law, Investment Coordination Board (BKPM) chairman Muhammad Lutfi said, according to the Jakarta Post.

The tax compels investors to apply for a foreign status in order to be eligible for lower borrowing rates in other countries, the report said.

The result was a 70% drop in domestic investment totals to $940 million and a 153% spike in foreign investment to $10.3 billion.

"After we tracked this down, we found that many Indonesian business people used foreign legal entities to benefit from lower tax rates in other countries," Lutfi said.

"Our tax rates were uncompetitive, compared to those in other countries," he added.

The Indonesian sovereign bonds due 2017 were unchanged at 101 bid, 102 offered.

In Pakistan, the International Monetary Fund said the country needs "substantial" capital support from foreign investors, reported the BBC.

Still, IMF official Mohsin Khan said that Pakistan has not filed a request for assistance with the IMF.

However, the feeble coalition in Pakistan has applied for $1 billion in loans from the World Bank and Asian Development Bank.

Pakistan is also in negotiations with Saudi Arabia to defer payments on $5.9 billion of oil it purchased.

Also in Asian corporates, South Korea's MangaChip Semiconductor paper saw a bounce as investors learned of the possibility that the chipmaker may receive new first-lien financing, a trader said.

The MagnaChip 6 5/8% notes and floating-rate notes due 2011 were each up 3 points at 61 bid, 62 offered.

The 8% notes due 2014 were 2 points better at 39 bid, 41 offered.

Philippine inflation at 17-year high

In the Philippines, year-over-year headline inflation hit 12.5% in August, up from 12.3% in July, according to a statement from the central bank.

The figure puts total inflation for 2008 at 8.8%, or the highest since December 1991.

However, inflation is within the expected 11.8% to 12.6% range.

The bank cited higher food and tobacco as well as fuel prices for the near-record inflation.

"The [central bank] will continue to monitor developments that can impact on inflation, including movements in global oil and food prices, to be able to craft monetary policy that is consistent with its price stability objective," said governor Amando Tetangco in a news release.

The peso was seen trading at 66.656 to the dollar.

The Philippine government bonds due 2030 fell 0.25 point to 128.65 bid, 129.25 offered.

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