Emerging markets' negative sentiment eases; Argentina discount bonds climb; trading muted

By Aaron Hochman-Zimmerman

New York, June 23 - Emerging markets traded slowly and drifted wider again on Tuesday, but the negative sentiment was less severe than during Monday's session.

The initial impression of the Federal Reserve meeting and a successful Treasury auction in the United States eased most of the pressure facing the equity market and therefore the emerging markets.

Still, the final results of Wednesday's Fed meeting were a cause for concern.

Argentina's discount bonds due 2033 added 1 point, but generally investors stepped away from the credit ahead of the June 28 legislative elections.

Outside of the emerging marketplace, "it looks pretty poor, really," a trader said.

Investors have kept their hands at their sides during the correction, he said, noting, "There's a lack of trigger pulling on the downside."

Tuesday's session was much like the previous sessions, with "Thursday and Friday last week markedly quieter than it had been for sometime," he said.

"It's felt like summertime-proper for the last few days," he said.

From the major markets, volatility peaked early but then trailed off as the day continued. Volatility gave up 0.59 to finish the day at 30.58, according to the VIX index. The index is a commonly used measure of market volatility.

As a sector, emerging markets widened by another 9 basis points to 467 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.

'Enough' in emerging Europe

Emerging Europe had "enough going on" so that the trading desks could not completely concentrate on watching Wimbledon, a London-based trader said.

Trades were available, but "you have to work hard to make it happen," he said.

The market was "moving as a pool, but there are exceptions at the fringes," he said.

Some value could be found in some of "those odd Russian names," which have recently suffered setbacks, he said.

Still, "that won't last long" if the entire sector begins to shudder.

One of the major Russian names which could be heard was VTB, which pulled an expected deal without more explanation than a standard "subject to market conditions."

In Turkey, the World Bank broadened its forecast for economic contraction to 5½% in 2009 from 2%.

The bank believes Turkey will return to growth in 2010 with a modest expansion of 1½%.

Meanwhile, the Turkish sovereigns due 2030 backed up by just 1/8 point to 151¼ bid, 151¾ offered.

Sparking summer gas war

Elsewhere in Ukraine, the government was in final-stage talks with the International Monetary Fund for a $4 billion loan to cover the remaining debt owed to Russia.

Reports suggested a new gas war may flare up this summer if an agreement cannot be reached between Russian, Ukrainian and European Union representatives.

Kiev's national gas firm NJSC Naftogaz Ukrainy has a payment due on July 7, and Moscow has threatened to cut off supplies if it does not receive payment.

Additionally, Ukraine needs to fill its reserve tanks with fuel to sustain Western Europe throughout the winter.

"We must not sleep-walk into another gas crisis," said European Commission president Jose Manuel Barroso.

The Russian government bonds due 2030 were quoted at 96 5/8 bid, 96¾ offered, while the Ukrainian bonds due 2016 were seen at 65 bid, 67 offered.

LatAm holding in range

Latin America traders had their sights set firmly on the coming Independence Day break in the United States, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The major catalyst or even dark cloud hanging over the sector is the Federal Reserve meeting.

Issues are close to the lower end of key support levels and a negative impression from the meeting "could push us to break the range," he said.

The primary market was nearly silent, and in Argentina "people are holding out" until after Sunday's election, Alvarez said.

The 8.28% Argentine discount bonds due 2033 added 1 point to 43¾ bid, 45 offered.

In Venezuela, "you've got a little bit of oil story and a little bit of risk aversion," he said.

Light sweet crude was seen trading below $67 per barrel.

The 9¼% Venezuelan government bonds due 2027 fell 0.45 point to 67 7/8 bid, 69 offered.

"Surprisingly, Ecuador has been much more resilient than either [Argentina or Venezuela]," he said, adding that its strong showing only supports the argument that the levels are being manipulated.

The 9 3/8% Ecuadorian bonds due 2015 were better by 2 points to 67 bid, 69 offered.

Meanwhile, Brazil's situation mimics the rest of the category, Alvarez said.

The bonds have "been trading very heavy over the last few days," and there is a worry that "a breakdown there would pull the rest of the category with it," he said.

The 7 1/8% Brazilian sovereign bonds due 2030 added 0.45 point to 96.8 bid, 97¾ offered.

Asia 'stabilized'

Asia traded with some moderate volumes and "stabilized after a pretty weak session yesterday," a trader said on Tuesday.

"There has been a re-entry of buyers" and "some short-covering in Indonesia," he said.

"Indo had probably been sold off a bit harder than the rest of the category," he said.

Also in Indonesia, the Ministry of Finance sold 2.2 trillion rupiah of debt maturing 2010, 2016 and 2024 with coupons of 10¾% and 10%, according to a statement from the ministry.

The rupiah was seen trading at 10,490 to the dollar.

The Indonesian sovereigns due 2019 were quoted at 122½ bid, 123½ offered.

The Philippines had some "disappointing fiscal data out," but it was only "at the margins causing weakness," he said.

The Philippine government bonds due 2030 were spotted at 120 bid, 121 offered.

Generally, the market was still in good shape, he said, considering "the market has done very, very well for the last couple months. I don't think yesterday was a particularly bad day."

Also in Asia, Pakistan's bonds due 2017 were seen at 65 bid, 68 offered.

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