Emerging markets mildly better; spreads tighten as Treasuries fade; Petrotemex sets size

By Aaron Hochman-Zimmerman

New York, Aug. 7 - Emerging markets ended a week of steep gains on a plateau as the long-running rally finally seemed to cool off.

Not much had changed according to many investors, but a bit of profit-taking and summer holiday season may have thinned out the buying.

Nonetheless, Venezuela turned in a strong showing amid low volumes, adding 1¼ point to its bonds due 2027.

On the primary side, Mexico's Grupo Petrotemex SA de CV prepared for the upcoming week by announcing a size of $200 million for its upcoming deal.

The petrochemical firm is holding a roadshow through Aug. 10, as is another upcoming issuer, Petroleum Co. of Trinidad and Tobago.

From the major markets, equity strength pushed volatility down 0.91 to 24.76, according to the VIX index. The index is a commonly used gauge of market volatility.

As Treasuries sold off, emerging markets tightened 9 basis points to a spread of 339 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors demand to hold assets in emerging market debt.

Petrotemex sets $200 million

In the primary, Petrotemex announced an amount of $200 million for its planned offering of five-year non-callable senior bonds (/BB/BB+).

JPMorgan and Morgan Stanley will act as bookrunners for the deal.

Proceeds will be used to refinance outstanding debt and for general corporate purposes.

Petrotemex is a Monterrey, Mexico-based petrochemicals firm.

LatAm mostly firmer

In the secondary Latin America was "essentially firmer, the problem that you have on a Friday is that say after midday you have a fade in actual liquidity," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"Now it looks a little softer," he said, so "it's not an exact portrayal."

Generally, the rally may have run its course.

"We've absolutely hit a ceiling in the overall level of rally," he said.

Bonds have traded "significantly ahead of any sort of fundamentals," he added, but noted that the picture is only magnified in the Latin American equity markets.

"Everyone is mounted on the same trades," he said. "They rode the recovery story way before other markets."

Meanwhile, "Colombia was a little firmer on the day," he noted, as president Alvaro Uribe took his goodwill tour to Brazil.

Uribe met with president Luiz Inacio Lula da Silva to calm concerns over the building U.S. military presence in Colombia.

"Brazil firmed a little bit," Alvarez said, but the situation in the region smolders with even greater resentment of the United States from Ecuador and especially Venezuela.

The 8 1/8% Colombian bonds due 2024 were up 1 point to 113¾ bid, 115 offered, while the 7 1/8% Brazilian bonds due 2019 eased just 1/8 point to 103¼ bid, 104 1/8 offered.

Also, the 9¼% Venezuelan government bonds due 2027 were better by 1¼ point at 73¾ bid, 74 7/8 offered.

Elsewhere, Argentina's recently red-hot 8.28% discount bonds due 2033 tacked on just ¼ point to 60¾ bid, 62 offered.

Emerging Europe up into weekend

Emerging Europe saw moderate trading for a summer Friday with a positive tone.

In Turkey, prime minister Recep Tayyip Erdogan and Russia prime minister Vladimir Putin signed a series of energy agreements.

Russia will assist Turkey with its first nuclear energy plant, reports said.

Turkey also gave its support to the South Stream pipeline which will run underneath the Black Sea from Russia to Bulgaria and on to Europe.

Agreements had previously been signed between the European Union and Turkey to allow for the construction of the Nabucco pipeline which will skip Russia on its route from Caspian Sea gas producers to Europe.

Meanwhile in Ukraine, president Viktor Yushchenko approved a package to prepare the country for accession to NATO, according to reports.

Ukraine has often been caught between its desire to align with the West and its economic dependence on Russia.

The divide between Western- and Russian-leaning Ukrainians will likely be a major issue in the upcoming presidential elections slated for Jan. 17, 2010.

Asia holds in

Asia continued to perform well even on slow Friday volumes.

In the Philippines, the money supply registered 12.6% growth in June versus the same period of 2008, according to the central bank.

The June totals are 1.1% better than the May totals, the bank said in a statement.

"Liquidity growth is one of the important variables considered in determining the [bank's] monetary policy stance," said officer in charge Nestor Espenilla.

"The continued strong growth of money supply indicates that the liquidity-enhancing measures earlier implemented by the [bank] have continued to work their way through the banking system to ensure ample funding for the requirements of the economy," he said in a statement.

The peso was seen trading at 47.725 to the dollar.

Elsewhere, Indonesia has been underappreciated by the rating agencies, Martin Honense, a Deutsche Bank analyst said, according to the Jakarta Post.

The country is considered a Ba3/BB-/BB by Moody's, Standard & Poor's and Fitch, but Honense recommended it be viewed as a BB+.

Further, by 2010, Honense said the country should be worthy of an investment grade BBB- rating.

"While other Asian governments were expanding fiscal policy aggressively, Indonesia's deficit barely budged. We expect Indonesia to contain the deficit to well within the current target of 2.5%," the report said.

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