Emerging markets quiet amid equity market losses; doldrums taking hold; spreads pulled wider

By Aaron Hochman-Zimmerman

New York, Aug. 17 - Emerging markets investors backed off from the table and kept hands in pockets while the major markets took a whipping on Monday.

Despite the mayhem on The Street, "it's just been really dry," a syndicate official said about emerging market credit.

"It hasn't done that much volume," he added.

Asia's major names, Indonesia and the Philippines, saw damage to their sovereigns, while Brazil saw continued, but modest strength in its recent retap of its bonds due 2037.

The Brazilian bonds due 2037 were spotted at 110.85 bid.

The silent primary allowed for speculation about the end of the August doldrums, but little more on Monday.

Investors expect to take the coming weeks to evaluate strategies for playing the reopening of the primary in September as well as guessing whether the rally will resume along side the increased new issue volume.

Meanwhile, from the major markets, equity weakness launched volatility up by 3.62 to close at 27.89, according to the VIX index. The index is a frequently used yardstick of market volatility.

Investors dove for the cover of Treasuries on Monday, while emerging markets widened by 10 basis points to a spread of 381 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.

LatAm sovereigns improve

Latin America largely sat out the pounding absorbed by the major equity markets on Monday.

"It's been quite the last couple of days," a syndicate official said.

"There haven't been any soundings or roadshows for the time being," he said.

The doldrums seem to have set in and will likely linger until September, he said.

However, at some point Brazilian issuers may lead the market back to the primary.

Brazil's Net Servicos de Comunicacao SA may be at the front edge of "the next issuance wave," he said.

Still, in trading many of the key sovereign names have seen slightly better activity along with the recent deals that have come through the Latin American pipeline.

Petroleum Co. of Trinidad and Tobago bonds have performed "really well or relatively well," he said.

The 9¾% bonds, which priced at 99.217 on Aug. 11, were seen trading up 0.05 point from Friday's close at 103.8 bid.

Mexico's Grupo Petrotemex SA de CV, which priced 9½% bonds at 99.029 on Aug. 12, has been illiquid and difficult to price, the syndicate official said.

"It's a small issue; it's hard to find a price," a strategist said on Friday.

In Brazil, the 7 1/8% bonds due 2037, which were retapped for an additional $25 million on July 30, have also done relatively well. The final retap priced at 108.63, but the issue was seen at 110.85 bid on Monday.

In Argentina, the chief of the statistics agency Indec, Norberto Itzcovich, admitted that the reporting method "has some problems," according to the Buenos Aires Herald.

Itzcovich called for some reforms to the widely doubted agency, but even going forward "statistics secrecy will exist," he said.

"We are looking to change the methodology of measuring poverty. This has been something we have wanted to do for a while and it is a long process," he said.

The 8.28% Argentine discount bonds due 2033 slipped ½ point to 59 bid.

Also in Venezuela, the 9¼% government bonds due 2027 were lower by just 1/8 point at 71½ bid.

Volatile emerging Europe wider

Emerging Europe traded wider as credit was left without any support from sinking equities.

"U.S. stocks and oil prices" were to blame for Russia's five-year CDS falling wider by 14 bps to 308 bps, a trader said.

Light sweet crude was seen trading as low as $66 per barrel.

"It's just following the general market picture," the trader said.

OAO Gazprom was subject to the same conditions, and its five-year CDS was also drawn wider by 14 bps to 408 bps.

"The ruble sold off as well," the trader said. The ruble was seen trading at 32.234 to the dollar.

Investors read headlines of the suicide bomb attack on a police headquarters building in the Ingushetia region on Monday. At least 20 are believed dead and over 125 injured.

"It's quite a remote region," the trader said, where unrest is fairly common. "It's not like it was Moscow."

The Russian sovereign bonds due 2030 gave up 0.6 point to 100.15 bid, 100.3 offered.

Asia steps backward

Asia's better-traded high-beta credits pulled back some of their recent gains as investors wondered whether or not the rally had any steam left.

Indonesia's benchmark bonds due 2019 gave back 2 points to trade at 131 bid.

However, finance minister Sri Mulyani believes that 5% to 6% growth is possible for the economy in 2010.

"We can grow more than 5%, or even 6%," she said, according to the Jakarta Post.

"We just need to be careful in the second half of this year," she said.

In the Philippines, overseas remittances grew by 3.3% and set a record high in June at inflows of $1.5 billion, according to the central bank.

The remittance total for the first half was pushed to $8.5 billion, 2.9% better than the same period of 2008.

"The continued growth of remittance flows since January this year accompanied by emerging signs of improving global economic conditions have affirmed the positive outlook for steady remittances for 2009," bank governor Amando Tetangco said in a statement.

The Philippine government bonds due 2030 gave back 1 point to 162¼ bid.

Meanwhile, China's Swire Pacific Ltd., which priced a 5½% bond at 99.529 on Aug. 12, was seen trading at 101.4 bid on Monday.

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