Emerging markets falter; LatAm corporates look to price; Russia, Ukraine fight as Europe freezes

By Aaron Hochman-Zimmerman

New York, Jan. 14 - Emerging market bonds continued their downward trajectory on Wednesday.

Spreads were pulled wider and "the market feels weak," a strategist said, as outside pressures undercut the category.

Still, one syndicate official was busy preparing for a busy week beginning on Jan. 19.

Latin America traditionally pushes for deals toward the end of January in order to take a summer break for Carnival in February, he said.

In the other sectors, Asia held relatively still, but the gas crisis between Russia and Ukraine began to take more of a toll.

Russian bonds were walloped as the two governments still could not agree to terms that would allow Ukraine to receive its supply and have enough to pass on to the rest of Russia's European customers.

Oil still fell as low as $36 per barrel on generally low demand from around the world.

Aside from sinking commodities, a poor showing for equities left volatility higher by 5.87 at 49.14, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets were pulled wider by 18 basis points to a spread of 686 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will require to hold assets in emerging market debt.

LatAm corporates fight to manage debt

Many corporate issuers are gearing up for a push to tap the market before the end of January, a syndicate official said.

"Next week should be a decent week," he said.

February is traditionally a very slow month for business in Latin America with Carnival and other distractions, he said.

The first one out of the pipeline may be Mexico's Pemex, which "has considerable financing needs," he said.

The state-owned energy firm needs to refinance $5 billion in debt, which comes due in 2009.

Also, Brazil's Arantes, which put together a much-maligned $150 million offering in June 2008, filed for Chapter 11 protection in the United States after declaring $100 million in derivative losses.

The deal priced at 99.046 with a coupon of 10¼% to yield 10½%.

Bondholders may sue the underwriters, the syndicate official said.

A deal which collapses that quickly may have "a structuring component to look into," he said. "That could be interesting."

LatAm slides wider

Latin America traded wider and weaker on Wednesday as new data gave way to equity pressure from the United States.

Ecuador made major waves again as its bonds were set at 31.375 cents to the dollar at auction, according to a release from Markit and Creditex.

Buyers of Ecuador protection will receive the full value of bonds held in exchange for 31.375% of their face value.

The 9 3/8% Ecuadorian bonds due 2015 improved by 0.5 point to 37.5 bid, 39 offered.

The exception in trading was Argentina, which was "better bid," a strategist said, but its small gains were set against the backdrop of a market that felt "fairly heavy," he said.

The 8.28% Argentine discount bonds due 2033 fell 0.4 point to 32.25 bid, 33.25 offered.

In Venezuela, president Hugo Chavez insisted that the economy will survive the current commodity environment and low oil prices.

Chavez also tempered his optimistic remarks with a warning that it would be dangerous for the country to allow him to leave office in this time of uncertainty. He, once again, stated a familiar case for a vote allowing him to stay in office past his current term limits.

Voters will go to the polls in February.

The 9¼% Venezuelan bonds due 2027 dropped 0.75 point to 58 bid, 59 offered.

Brazil was battered badly as the new 5 7/8% bonds due 2019 "underperformed significantly," a syndicate official said. The bonds dropped to 96 bid.

Meanwhile, the 11% bonds due 2040 were quoted at 126 bid.

Emerging Europe eyes gas fight

In the emerging European sector, lawyers are gearing up for what is likely to become a legal fight to turn the gas on and send it flowing from Russia through Ukraine back into the European Union.

Representatives of some of the hardest hit countries, Bulgaria, Moldova and Slovakia, were in Moscow for talks, and the E.U. leadership said it will advise lawsuits against OAO Gazprom and NJSC Naftogaz Ukrainy if a solution is not found quickly.

"If the agreement is not honored, it means that Russia and Ukraine can no longer be regarded as reliable," said European Commission president Jose Manuel Barroso, according to the BBC.

Still, despite the pleas and possible legal actions from the West, Moscow and Kiev continued negotiations as respective prime ministers Vladimir Putin and Yulia Timoshenko spoke in a phone conversation Wednesday.

Timoshenko has insisted that a price of $450 per 1,000 cubic meters for 2009 is too great a burden on Ukraine and negotiations and line blockages will continue until Russia relents.

Russia accused Ukraine of diverting fuel intended for other customers to its domestic users.

The ruble fell, oil fell and the Russian sovereign bonds due 2030 fell by 2 points to 87.75 bid.

Meanwhile, Turkey cut its GDP growth estimate to 1% from 4% after concluding talks with representatives of the International Monetary Fund, reports said.

The Turkish government bonds due 2030 were seen at 142.35.

Asia calm, holds steady

Asia traded quietly and flat in the major names even as equities, commodities and sentiment sank elsewhere.

In the Philippines, the benchmark sovereign bonds due 2030 were again steady at 111 bid.

In Indonesia, the bonds due 2018 were also unchanged at 78 bid.

Meanwhile in Thailand, the central bank announced a greater-than-expected rate cut of 75 bps to 2%.

The baht was seen trading at 34.925 to the dollar.

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