China, Spain boost confidence but not enough to invigorate markets; primary still on pause

By Christine Van Dusen

Atlanta, June 10 - The positive economic news out of China and the successful auction of Spain's three-year notes may have boosted market-watchers' spirits on Thursday, but it still didn't translate into strong trading or a pick-up in the primary for emerging market debt.

"There's really no news about emerging markets," a Zurich-based trader said.

"It's quiet," a New York-based market source said. "I've been doing this a long time, and this is as quiet a market as I've seen, for such a long period of time. There's just so much indecision and uncertainty."

Some confidence returned with the report that Chinese exports rose almost 50% in May over the previous year, exceeding forecasts and giving the impression that the global economic crisis may not be spreading quite as fast or as far as initially thought. Meanwhile, Spain sold almost €4 billion of a 2013 issue of notes, indicating that risk aversion may be waning.

And the European Central Bank announced it would continue to buy government bonds and maintain a liquidity program for the financial system for the short term, news that buoyed the euro and sent yields on 10-year Treasuries up about 13 basis points by mid-afternoon, a market source said.

"We're having a better day today," a California-based buyside source said. "There's a better risk asset sentiment, in general."

At late afternoon in New York, the JPMorgan Emerging Markets Bond Index Plus spread was 319 basis points, 19 bps tighter. The JPMorgan Emerging Markets Bond Index Global spread was also 19 bps tighter, at 337 bps.

"There's a positive global backdrop today," the New York-based market source said. "Equities are up on the back of the good China numbers and the Spanish auction. That's given a little positive boost. Plus, the euro is bouncing a little, giving guys confidence."

No buying spree

But even as equities were up 2%, bonds like the Philippines 2020s and the Indonesia 2020s were "unchanged," he said. "They just sit there in price. They might tighten 10 or 11 bps but there's a lack of activity. There's not a buying spree. The prices go up a little bit and then just sit there. Everyone is in wait-and-see mode. They're not sure how to sort of position themselves."

At the same time, Argentina was tighter by 40 bps and up about 1% while Venezuela was up 3%, the California-based source said.

The flow of capital is "not really clear," the New York source said. "People are obviously fleeing the euro for the time being and going to dollar assets. Frankly that's given a reasonable boost to higher-grade names like Peru, Brazil and Mexico. They're seeing some volatility, but not a lot, which is not what I'd expect to see during these times."

Also strange, he said, is the fact that there are so many differing opinions on just what is going on in the markets. "The camps are so diverse. I can't remember a time when some guys were thinking spreads and risk assets were going to blow out and others were saying it's just a correction and the bull market is fully intact."

Contributing to the sense of uncertainty is lingering concern over the state of sovereign debt, as well as last week's release of the U.S. Labor Department's report on nonfarm payrolls for May, which showed employers added a fewer-than-expected 431,000 jobs, mostly temporary jobs for the 2010 census.

Though other economic numbers have been fairly positive, they've been eclipsed by the "terrible unemployment numbers. We still have overhang from that," the New York-based source said. "People have to work to spend money. If they have no jobs, they aren't making money and they aren't spending money."

PGNiG taps bookrunners

All the uncertainty "freezes the primary markets," he said. "There's no new issuance."

The only issuer generating any buzz on Thursday was Polskie Gornictwo Naftowe i Gazownictwo, which mandated Bank Pekao, ING Bank Slaski, PKO Bank Polski, Bank Handlowy w Warszawie SA, Societe Generale and BNP Paribas for a planned bond issue totaling up to PLN 3 billion, according to a company statement.

The bonds will carry maturities ranging from one month to one year.

Proceeds from the first bond issue will be used to repay a multi-currency credit facility maturing on July 27. Proceeds from subsequent issues will be used for investment projects.

"PGNiG intends to increase its expenditure on oil and gas exploration, both in Poland and abroad, to over PLN 900 million," the statement said. "Additional funds will also be applied toward shale gas exploration in Poland."

PGNiG is a natural gas company based in Warsaw, Poland.

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