Emerging markets close week mixed; trading action quiet at month-end; spreads wind tighter

By Aaron Hochman-Zimmerman

New York, Jan. 30 - Emerging markets completed an indecisive week of shifting tones and returns with a similar performance on Friday.

It was often the corporates making up ground where sovereigns had lost, but overall "the week has been reasonably good," a trader said.

"There's been lots of noise and price movement, but no pattern," he said.

"It just feels choppy ... it feels volatile," he said.

The volatility is not likely to give way to a stronger February, a buysider said.

"We will probably see a retracement of the rallies we saw in January," the buysider said.

The primary market was relatively quiet on Friday; however, fears of more supply served to undercut Indonesia in trading.

The bonds due 2018 fell by 2.5 points as the government prepares to begin a non-deal roadshow on Monday.

Another down day for equities pushed volatility up by 2.21 to 44.84, according to the VIX index. The index is an often used gauge of market volatility.

Also, as a sector emerging markets tightened by 3 basis points to a spread of 628 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia's mixed returns

Asian traders were largely back at their desks on Friday, but despite the return from the Chinese New Year holiday, the "markets didn't really get going that well today," a trader said.

It was difficult to determine the market's mood with so few data points, he said, but "generally the market is wider."

Asian investment-grade issues were 5 bps to 10 bps wider, but "cash bonds are holding well," he said at New York's close.

The recent corporate issues from the Korea Development Bank and the Export-Import Bank of Korea "backed up a little bit," he said, with "pretty good buying."

The KDB bonds due 2014 were seen trading at 648 bps bid, and the Kexim bonds due 2014 were seen trading at 623 bps bid.

On the sovereign side, there was "better selling of Indonesia" as "people are anticipating that there's going to be some supply."

Few details are known about the new Indonesian program, and it is likely the government has not yet decided how it will proceed.

"I think we're going to see a few different iterations of this before an offer is finalized," he said.

Also in Indonesia, the government hopes to wean the country away from energy imports by offering subsidies for biofuel development.

Under the plan proposed by the energy mineral resources minister, Purnomo Yusgiantoro, the country's government-run energy firm, PT Pertamina, will receive $0.089 per liter of biofuel it distributes.

Lower oil prices have largely precluded a commercial drive to switch fuel sources, the report said.

However, "the subsidy will be given on condition there will be a higher price for biofuel feedstocks," Purnomo said.

Light sweet crude was seen trading as low as $41 per barrel.

The Indonesian bonds due 2018 sank 2.5 points to 77 bid, 79 offered.

Meanwhile in the Philippines, the bonds were "holding very well" on Friday, after Thursday's 50 bps rate cut and positive news about its GDP.

The Philippine sovereigns due 2030 inched up 0.25 point to 112.25 bid, 113.25 offered.

Also, Pakistan's bonds due 2017 continued to hover in the area of 40 bid, 44 offered.

Emerging Europe ends soft

Emerging Europe ended a volatile week as levels slipped into Friday's close.

"Russia, the sovereign, is off a point or a point and a half," a trader said, but "the corps are all solid."

"So there are mixed signals there," he said.

In Russia, first vice-premier Igor Shuvalov told the state duma that the ruble's problems cannot be fixed in the near term, the Itar-Tass News Agency reported.

Before the economic crisis ends, the ruble will likely face an exchange of 36 rubles to the dollar, he said.

"It probably goes there, I suspect," the trader said, adding that it probably tests the current band at 41 rubles to the dollar as well.

Currently, the ruble was seen trading at 35.808 to the dollar.

The Russian government bonds due 2030 fell 1.5 points to 92.5 bid, 93 offered.

Meanwhile, Ukraine's bonds due 2016 were quoted at 45 bid, 47 offered.

In Turkey, economy minister Mehmet Simsek said he will not account for a new International Monetary Fund loan in the 2009 budget, according to the Hurriyet Daily News.

Despite the precautions, the negotiations for a possible $25 billion agreement with the IMF will proceed in order to smooth over the differences between the sides' views of how the money should be spent.

The IMF has encouraged Turkey to use the funds to shore up its budget and fiscal policy, while Ankara hopes to spend the money as part of a stimulus package.

"Turkey needs a program with or without the IMF ... The crisis will continue to affect Turkey even if we have an IMF-backed program," Simsek said in the report.

The Turkish sovereigns due 2030 were also lower by 1.5 points at 141 bid, 142 offered.

LatAm goes quietly

Latin America closed out the week without much commotion on Friday.

"It's been fairly quiet," a buysider said. "It's month's end."

Tone has been difficult to gauge amid poor data and falling stocks, but "spreads are tighter," the buysider said.

The high-betas Argentina and Venezuela were slightly weaker.

The 8.28% Argentine discount bonds due 2033 were spotted at 34.5 bid, 35 offered.

The 9¼% Venezuelan government bonds due 2027 were seen at 51 bid, 52 offered.

Elsewhere in Brazil, the traditionally more stable 11% Brazilian bonds due 2040 were quoted at 124.75 bid, 125.25 offered.

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