Emerging markets rally back; tone recovers with equities; Chile's Codelco prices $600 million bonds

By Aaron Hochman-Zimmerman

New York, Jan. 21 - Emerging markets muddled through a morning of losses and widening spreads, but as equities found a way to pick up gains, credit followed.

"It's a dangerous market," a trader said during London's afternoon, but by New York's afternoon, sentiment was strong again.

Volumes were too thin to establish any strong patterns, a trader said. The market has often remained stable despite the worst expectations.

Expectations were, as much as ever, linked to the United States, and the emerging world came along for a wild ride on Wednesday.

U.S. equities were able to find their stride later in the day, however, and volatility sank by 10.23 to close at 46.42, according to the VIX index. The index is an often used gauge of market volatility.

In the primary market, Corporacion Nacional de Cobre de Chile (Codelco) emerged to issue a $600 million 7½% 10-year bond on Wednesday, becoming the first Latin American company to issue a bond to international markets since July.

The Santiago, Chile, copper producer said the deal generated strong investor interest.

As a sector, emerging markets was seen tighter by 9 basis points to a spread of 673 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia rebounds

After a difficult morning, Asia posted what became "a pretty constructive day," a trader said, despite thin volumes.

Indonesia, which has been a consistent underdog, saw its bonds due 2018 rally back from 3-point to 4-point losses to close up by 1 point at 76 bid, 79 offered.

"There was good buying on the way down," the trader said, as well as after the recovery.

The real action during the session, however, was in currency, he said.

The yen whipped around wildly against the euro, but its strength has been "a very good barometer for market risk," the trader said.

The "bullish signs" have not made any material differences, outside of general tightening by 10 bps to 15 bps for the day, but the currency move itself was "almost unprecedented."

Sovereign cash bonds were general outperformers, where in the Philippines, the government bonds due 2030 were ever stable at 111 bid, 112 offered, even as the public sector surplus fell by 60% to PHP 23.5 billion, the Department of Finance said, according to the Manila Times.

"The 60% decrease in surplus from the same period last year is in accord with the pump priming objectives of the government," the statement continued.

Excluding regional governments, Manila registered a deficit of PHP 53.3 billion in September, compared to PHP 40 billion in September 2007, the report said.

On the corporate side, the new issues from the Export-Import Bank of Korea and the Korea Development Bank "have come off their wides but are still hanging around their wider levels," he said.

Kexim traded at a spread of 560 bps bid, while KDB traded at a spread of 670 bps bid.

Quiet emerging Europe sinks

Emerging Europe felt fragile on Wednesday, a trader said. "The backdrop is obviously pretty poor."

Still, even after the intrigue of Inauguration Day in the United States, "it's very quiet," he said.

"It was a struggle to get anything done," he said.

The details of a gas settlement between Russia and Ukraine were still being worked out during the session.

Russia's OAO Gazprom said it would not withdraw its lawsuits against its counterpart in Kiev, NJSC Naftogaz Ukrainy.

Naftogaz's bonds due 2009 traded lower during the action near 54.8 bid, but "yesterday afternoon 55 to 57 [bid] would have worked," the trader said about Tuesday.

The Ukrainian sovereign bonds due 2016 were quoted at 44 bid, 47 offered.

The Russian government bonds due 2030 were lower by 0.375 point at 88.75 bid, 89 offered.

Meanwhile, Russian gas found its way through Ukraine and into Turkey since Russia cut supplies to the Western pipeline, reports said.

Turkey had received as much as 40 million cubic meters of natural gas per day from the pipeline before Jan. 6, the Hurriyet Daily News reported.

The Turkish sovereigns due 2030 dipped by 0.25 point to 142 bid, 143 offered.

LatAm covers early losses

Latin America was able to capitalize on a resurging stock market in the United States.

Market activity around Latin America improved on stronger equities as well as commodity prices.

Meanwhile, Chile's Codelco issued a $600 million 7½% 10-year bond on Wednesday.

The company said the deal sparked great interest, drawing demand of almost twice the anticipated demand, including the participation of more than 80 investors.

Codelco's vice president of finance and management, Mario Espinoza, noted that obtaining these resources in the difficult market conditions demonstrated the confidence investors have in the plans of the company.

"There has practically been no capital raising in the last six months on behalf of Latin-American or mining companies due to the financial international crisis," Espinoza said in a news release.

The bond priced at the low end of price talk via bookrunners HSBC and JPMorgan.

Proceeds will be used to cover obligations due in 2009.

Meanwhile, Brazil's state-run oil firm Petrobras pledged to go ahead with the construction of a new refinery without the partnership of Venezuela's state energy firm PDVSA.

The two companies are locked in a disagreement over the amount Petrobras will pay for Venezuelan oil.

Venezuelan oil is below the quality of West Texas Intermediate or Brent Crude, but Petrobras claims the Venezuelans want higher than market value for their oil, reports said.

The 11% Brazilian bonds due 2040 were spotted at 124 bid.

Elsewhere, Argentina's 8.28% discount bonds due 2033 were seen better by 0.5 point at 35.15 bid.

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