Emerging markets claw higher; High betas tighten; Pipeline slows ahead of Fed

By Aaron Hochman-Zimmerman

New York, April 28 - Emerging markets managed to pull tighter on Monday even as investors were hesitant to put money to work on the week of International Labor Day and the Federal Open Market Committee meeting, which begins on Tuesday.

In trading, Argentina and Venezuela began to turn toward recovery in the face of further political disasters.

The benchmark sovereigns of both countries narrowed by 10 basis points while Argentina's discount bonds due 2033 traded higher by 1.625 points.

In the primary, new issues were slow to come back from the weekend and may continue on a similar tack all week, a syndicate official said.

"It's been slow. It's a pretty big news week and a holiday week," a strategist said, predicting light action in the primary and secondary markets.

As equities bounced, volatility ended slightly higher but was still below 20.00 as it gained 0.05 to end at 19.64, according to the VIX index. The index is a standard measure of market volatility.

As a sector, emerging markets was wider by 3 bps to a spread of 264 bps, according to the JPMorgan EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to keep assets in emerging markets debt.

LatAm strong and quiet

Trading in Latin America was slow and illiquid ahead of the week's FOMC meetings and International Labor Day on Thursday.

"It's going to be quiet," a syndicate desk official said, "I don't expect anything to happen until Monday."

However, "there was a little bit more of a rally than I expected," he said, with some tightening in the more politically volatile countries such as Venezuela and Argentina.

In Venezuela, the government priced another $4 billion in debt on the local market with $2 billion of the 9% bonds due 2023 and $2 billion of the 9¼% bonds due 2028 sold.

"The rumors were that they could have done up to $5 [billion]," the syndicate official said, adding that there were no serious concerns of oversupply.

Also, president Hugo Chavez indicated that he may decide to expropriate steel manufacturer Sidor rather than pay $4 billion for a 60% stake in the company, which is presently owned by Luxembourg's Ternium SA.

The government originally announced it would nationalize Sidor on April 9.

The 9¼% Venezuelan sovereigns due 2027 tightened by 10 bps and added 0.25 point to 90.25 bid.

In Brazil, a poll by Sensus Institute for the National Transport Confederation found that 50.4% of Brazilians favor a third term for president Luiz Inacio Lula da Silva even though the constitution does not allow for third terms, Reuters reported.

Lula has said he would not seek a third term, but vice president Jose Alencar has already begun taking action to amend the constitution.

"The damage you would do or at least the risk of the damage to the democratic process ... They've done a good job, now it's time to move on," a syndicate official said.

The 11% Brazilian bonds due 2040 were better by 0.05 point to 134.3 bid, 134.55 offered.

In corporates, the global rising of commodity prices has so far had only a mild effect on Latin America's grain and meat producers, "but it may in the future," said a strategist who focuses on Latin American corporates.

"So far it's been a little frothy," the strategist said about the beef sector, "[Brazil's Grupo JBS Friboi] has traded up pretty nicely."

Farmers cultivating a deal

In Argentina, leaders of the farmers' groups suggested they may extend the strike holiday if the new economy minister, Carlos Fernandez, shows a willingness to enter into serious negotiations about the export taxes on farm goods, the Buenos Aires Herald reported.

The farmers are expected to go back on strike on Friday.

Fernandez replaced Martin Lousteau, who resigned Friday due to differences in opinion with other members of the government over how to handle the economy and the farmers' protests.

Lousteau is often described as an independent thinker and was one of the few cabinet ministers in Cristina Kirchner's administration who did not come from her husband, Nestor Kirchner's administration.

The overtures by the farmers were not really encouraging, a strategist said, "It's wait and see."

The 8.28% discount bonds due 2033 tightened by 10 bps and added 1.625 points to 77.5 bid.

Emerging Europe creeps higher

Emerging Europe traded better, but the light volumes made the successes minor ones.

Russia's inflation will remain under 10% in 2008, said deputy prime minister and finance minister Alexei Kudrin, according to the Itar-Tass News Agency, adding that the exchange rate will not drop below 23 rubles to the dollar.

"We have not established control over money supply. We spend too much, including our oil profits," he said on the NTV channel.

Kudrin maintained his optimism over the country's economic future but said macroeconomic stability should be the first priority.

On Monday, the ruble was seen trading at 23.609 to the dollar.

Russia also said it would continue trade talks with the United States, which began with the meeting between president George Bush and president Vladimir Putin at Sochi, Russia, on April 5.

The two sides met in Washington, D.C., on Monday to discuss economic issues concerning investment and natural resources.

The Russian sovereign bonds due 2030 were seen up 0.3 point to 114.8 bid.

Meanwhile, Ukraine and Russia may be ready to put more certainty into the future of the energy trade between the two with 10-year contracts.

"We would like to build transparent, specific and clear relations in this sector for years to come, maybe even for a decade, formalizing all aspects of gas supplies and transit," Russia prime minister Viktor Zubkov said on Monday at the Russian-Ukrainian Committee on Economic Cooperation in Kiev.

Georgia 'preparing for war,' Abkhazia says

Also from the commonwealth of independent states, Georgia's breakaway ethnically-Russian region of Abkhazia announced that it will sign a "military agreement" with Russia, said Sergei Shamba, the foreign minister of the unrecognized Abkhazia.

"It's not a secret that Georgia continues the military build-up. It has armed itself to the maximum, and it is doing all this for one purpose only. Georgia is preparing for a war," he said.

"Russia will do its best to prevent war in the Georgian-Abkhazian conflict zone. Yet, it will have to respond with military methods if an armed conflict begins. We will have to protect innocent people if they are made [to] suffer," said Valery Kenyaikin, a representative of Russia's foreign ministry for CIS affairs.

Russia has denied shooting down a Georgian air force drone flying over Abkhazia on April 21.

The Georgian bonds due 2013 were quoted at 100.5 bid, 101 offered.

Asia climbs slowly

Credits in Asia traded lightly but were able to make slight gains as the market shuddered awake on Monday.

In the Philippines, foreign investment portfolios posted $198 million in outflows during March, compared to inflows of $371 million in February and $173 million during March of 2007, the central bank said.

Of the total $739 million of foreign assets invested, 78% is in equities, 18% is in government securities and 4% is in peso time deposits.

"Heightened worries over the impact of the slowdown of the U.S. economy and the tight credit conditions in major financial markets have adversely affected investments in emerging markets, including the Philippines," the bank said in a statement, adding: "A number of positive domestic economic reports, however, mitigated investors' concerns, including the 53% year-on-year decline in the fiscal deficit in January and reports of robust corporate earnings for 2007."

Also in the Philippines, with a strong peso, private companies settled $281 million of debt by the end of February.

The central bank has urged public and private institutions to prepay debt in order to hold down inflation of the peso, the Manila Times reported.

The peso was seen trading at 42.12 to the dollar.

The Philippine sovereigns due 2030 added 0.25 point to 131.375 bid, 131.875 offered.

In Indonesia, president Susilo Bambang Yudhoyono said that rising food prices may be "a blessing" for the country, according to the Jakarta Post.

He made the comments in Java, which he said will likely see a 3 million ton surplus crop of rice this year.

Last week the government raised the price of rice in order to take advantage of prices, aid farmers and discourage smuggling.

"A smart nation is a nation that is able to take a lesson and a blessing from the crude oil price increases. We have to increase our oil production while seeking other alternative sources of energy," Yudhoyono said.

The Indonesian government bonds due 2017 also took on 0.25 point to 102.5 bid, 103.5 offered.

Elsewhere in Asia, Pakistan is close to signing an agreement with Iran to build a $7.5 billion gas pipeline to India.

The pipeline may also serve to bolster security in the region by increasing cooperation, analysts said, according to the BBC.

However, the United States opposes the pipeline, which may undercut efforts to isolate Tehran over its nuclear ambitions, the report said.

Primary to cool during slow week

The primary market came into a holiday week full of market data with the expectation of light action.

Although, soon, "I think there will be more of those bank deals," a strategist said about Latin American banks, noting the $110 million deal from Brazil's Banco Cruzeiro do Sul, which priced Friday.

Also, Indonesia's PT Indofood Sukses Makmur Tbk. (AA+, local) introduced an offer for a 1.5 trillion rupiah five-year bond.

The issue is expected in the first week of June.

DBS Vickers, Danareska, ING, Kim Eng and Mandiri Securities will act as bookrunners for the deal.

The majority of the proceeds will be used to refinance debt. The smaller portion will be used for working capital.

Indofood is a Jakarta-based food supplier.

On Tuesday, market watchers are expecting a 7¼% ruble-denominated bond from Merrill Lynch & Co., which has been talked at par.

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