Emerging markets end week improved; near-term sentiment still strong; spreads in with Treasuries

By Aaron Hochman-Zimmerman

New York, Jan. 9 - Emerging markets activity recollected itself on Friday to cap a generally strong week despite some setbacks on Thursday.

"We continue to see direct correlation with what's going on in the equity market," a strategist said.

During the action on Friday, it was easier to find investors looking to buy, not to sell, he said.

The market felt a few small hiccups as it digested the $4.5 billion in new issuance that grew out of the primary during the week, but the market still managed to post the first week of inflows since August, according to EPFR Global.

In trading, Brazil slipped on Thursday and stagnated on Friday after a generally successful $1 billion issue on Tuesday; but another of the week's issuers, the Philippines, saw its new bonds due 2019 trade better by 2.5 points since printing.

Equities waffled on Friday, then crumbled into the close as volatility added only 0.26 to end at 42.82, according to the VIX index. The index is an often used gauge of market volatility.

As Treasuries stepped higher, emerging markets tightened by 3 basis points to 650 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia ends 'very constructive week'

Asia posted a "quiet end to the week," which was "a very, very constructive week for the Asian credit market generally," a trader said.

"CDS spreads were nicely tighter," he said.

Investment-grade, higher-beta names were 20 bps to 30 bps tighter, and the lower-beta names were 5 bps to 10 bps tighter over the course of the week, "with an increased demand for cash issues," he said.

The Philippines made the biggest splash of the week with a $1 billion new issue on Wednesday, which was "a pretty significant success," he said.

Since the sale, the Philippine five-year CDS narrowed 25 bps to 30 bps while its new bonds due 2019 traded up 2.5 points to 101.65 bid.

The Philippine bonds due 2030 were spotted at 111 bid, 111.75 offered.

Elsewhere, the market also started to see "more demand for bank paper," the trader said, which had occupied a middling area between high grade and high yield.

Also in Asia, Indonesia's bonds due 2018 were seen at 84 bid, 86 offered, while Pakistan's bonds due 2017 were lower at 32 bid, 37 offered.

Just catching up?

Many investors are becoming more cautious of a sell-the-news scenario developing around a planned stimulus package promoted by the incoming administration of president-elect Barack Obama.

The strength the market has enjoyed over the week may be the result of pricing in that aid package, but it may also be Asia, with its low supply, lagging U.S. investment grade, the trader said.

"Investment grade seems to be running out of steam," he said, but the Asian market "lagged a bit in December so we may be playing a bit of catch-up."

The tempo in Asia will have a natural easing period around the Chinese New Year, which falls on Jan. 26.

"Chinese New Year always comes in and kind of interrupts what would be a heavy issuance time," he said.

LatAm ends big week

By the close of the week, Latin America felt better than when it started, but only moderately so, a strategist said.

"The fact is we've had new issues, which is a change from what we've seen," he said, but "that was expected" and the sector did have "some digestion problems at the very end."

"There seems to be some cash around," he said, but people are shunning the high-betas and are "still looking for the better credits."

"No really major changes out there," he added.

Brazil put $1 billion into the market on Tuesday and may lead the next wave of semi-sovereign and corporate issuance with the state oil firm Petroleo Brasileiro SA.

"Petrobras is one thing that came out," the strategist said, but the details of an offer were yet to hit the market.

"They can always [issue]," a syndicate official said.

"They have a lot of capex this year," he added.

The 11% Brazilian sovereign bonds due 2040 were up by just 0.3 point at 129 bid, 129.25 offered.

In trading, "we're still waiting to see which way Argentina will go," the strategist said.

The high-beta's success at the beginning of the week began to fade into Friday, but the 8.28% Argentine discount bonds due 2033 held their ground, remaining unchanged at 33.5 bid, 34 offered.

Also, president Cristina Kirchner was "unwell" and skipped a rally due to a heat wave, the Buenos Aires Herald reported.

Former president Nestor Kirchner attended in her place and said her low blood pressure was "nothing serious," the report said.

Cristina Kirchner has given no indication that Sunday's planned trip to Cuba may be cancelled.

Elsewhere around the category, "there has been some strong demand in the Central American credits" as well, the strategist said.

Possible gas deal eyed

Emerging Europe largely continued to hold off any damage that may be brought on by the gas crisis, which still threatened to spread across the continent.

In Russia, officials of the state-run oil firm OAO Gazprom still refused to resume gas shipments to or through Ukraine until oversight teams from the European Union are in place to monitor the pipelines.

"In violation of the international law, since the beginning of 2009 Ukraine has been siphoning off the natural gas intended for European consumers. Later Ukraine has fully stopped gas transit to Europe," Gazprom said in a statement.

Many reports expressed some optimism over the expected arrival of the E.U. monitors, but Ukraine's NJSC Naftogaz Ukrainy was not as confident as late at Friday.

"The negotiations are fruitless for the time being; the Russian delegation appeared to be unready for the talks to go on," a Naftogaz statement said.

Light sweet crude was seen trading below $40 per barrel.

The Russian bonds due 2030 were improved to 91.25 bid, 91.75 offered.

Elsewhere in Turkey, exports of natural gas to Greece continued despite the problems on the other side of the Black Sea.

Turkey's energy minister Hilmi Guler also added that he expects a resolution to the conflict in the near term, according to the Hurriyet Daily News.

"Gas supplies to Greece via Turkey are continuing; there is no problem with that," Guler said in the report.

Turkey, which is receiving slightly smaller amounts of gas from Russia, denied a request from Athens for more fuel.

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