Emerging markets coast on low trading volume; Argentina still rolling; primary market remains quiet

By Aaron Hochman-Zimmerman

New York, Aug. 14 - Emerging markets watched the equity side fight off a morning dip caused by a 0.5% consumer price index jump in the United States.

Meanwhile, emerging market credit traders fought off the boredom as August set in to smother trading volumes.

The highlight was Argentina, which held on as an outperformer on the heels of its bond buyback program. The benchmark Argentine discount bonds due 2033 added 0.8 point.

In the primary, market watchers speculated that the week beginning Monday may see new issuers step out into the light, but on Thursday the primary was clearly locked with the lights turned off.

In the broader market, equities shook off a morning drop to rally back and cut volatility numbers by 1.21 to 20.34, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets crept closer to a spread of 300 basis points as it widened by 4 bps to a spread of 296 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to hold assets in emerging markets debt.

Argentina outperforms LatAm

In Latin American trading "Argentina was a little on the upside," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

However, "as you look through the rest of the category there's really nothing to write home about," he said.

Argentina has its problems with a 0.4% inflation rate, "which no one believes," a dwindling source of revenue after the legislature defeated the farm tax and Moody's, which changed the credit's outlook to stable from positive.

In addition "growth rates are expected to be softening," Alvarez said.

The bonds were able to cling to small gains based on the proposed buyback program and higher taxes on higher income brackets, he said.

The income taxes are not sufficient to completely replace the defeated farm tax bill, but "they're just trying to plug holes here," he said.

The 8.28% Argentine discount bonds due 2033 improved by 0.8 point to 74.4 bid, 75 offered.

In Venezuela, oil dropped again, but in recent sessions the impact from crude prices has been "minimal," Alvarez said.

The 9¼% Venezuelan sovereign bonds due 2027 took on 0.35 point to 88.6 bid, 89.35 offered.

Also in Latin America, Brazil's 7 1/8% bonds due 2037 dropped 0.1 point to 111.25 bid, 111.65 offered.

Asia pronounced dead

In Asia, "today for the first time it's properly, properly dead," a trader said.

During the session, the sector "traded in a very, very narrow range," he said as some morning nervousness over U.S. inflation data gave way to some tightening into the afternoon.

An overall positive tone to the week may allow for some new issues to poke through the monotony next week, he said, but more so in the other sectors.

All over Asia people are distracted by the Olympics, he said.

According to the source's colleague in Singapore, "you just can't believe how switched off people are," he said.

In the Philippines, the central bank reported a foreign direct investment outflow of $397.2 million for the first seven months of the year, compared to a $3.6 billion net inflow for the same period of 2007, according to a bank press release.

Still, during July the bank took on and inflow of $20.2 million.

"Contributing to this positive development were the easing of oil prices, the strengthening of the peso and the improving fiscal position of the government," said bank governor Amando Tetangco in a statement.

The Philippine sovereign bonds due 2030 were flat at 128.375 bid, 128.875 offered.

In Indonesia, the government's budget deficit is likely to drop to 1.8% of the GDP, the finance ministry said, according to the Jakarta Post.

"Assuming government offices can fully absorb the allocated budget, in addition to Rp 3 trillion in further funding, the deficit will hit 1.8%," said the finance ministry's Anggito Abimanyu in the report.

If the finance ministry is correct, the lower deficit will allow the government to cut back some of its borrowing.

Much of the government's budget had been taken up in oil subsidies, but as prices continue to drop, the pressure has eased, the report said.

Light sweet crude was seen trading as low as $113 per barrel.

The Indonesian sovereigns due 2017 were quoted unchanged at 100 bid, 100.5 offered.

Musharraf likely to resign

Also in Asia, Pakistan's president Pervez Musharraf is likely to resign in the coming days amid building pressure against him.

Many of his former allies have favored the opposition or remained neutral as in the case of the widely respected and influential army.

Earlier, Musharraf asked his parliamentary opponents to prevent a serious destabilization of the country by withholding their threats of impeachment charges against him.

"Our adversaries are trying to destabilize Pakistan from several fronts, internal as well as external," he said, according to the BBC.

Still, many of the country's newspapers agreed that the sentiment in the country strongly favors his departure from office.

The Pakistani sovereign bonds due 2017 have hardly moved, a trader said, and have kept a bid in the high 60s, low 70s range.

The Pakistani five-year CDS was quoted wider at 780 bps bid, 710 bps offered.

Emerging Europe plays political chess

From Georgia and Russia, conflicting reports of Russian troop movements still dominated the headlines as diplomats tried to work toward a permanent arrangement for the strategic Caucasus region.

Russian president Dmitry Medvedev has stated that his country will support whatever final status the people of the breakaway republics choose.

"The position of the Russian Federation is unchanged. We shall support any decisions the people of South Ossetia and Abkhazia will make in conformity with the United Nations Charter, the international convention of 1966, and the Helsinki act on security and cooperation in Europe," he told the Itar-Tass News Agency.

For its part, the United States sent the first shipments of aid to Georgia and expects secretary of state Condoleezza Rice to meet with the Georgian leadership in Tbilisi on Friday.

Georgia's neighbor Turkey, a NATO-member, also expressed concern over its ally, trading partner and fellow oil conduit.

Prime ministers Recep Tayyip Erdogan and Vladimir Putin met Wednesday to discuss trade and security.

The Russian bombing of Tbilisi caused pipeline operator the United Kingdom's BP to shut many gas lines including the Baku-Tbilisi-Ceyhan pipeline, which runs through Turkey.

As the Georgian crisis cooled, Turkey, in search of a more reliable energy source, faced another diplomatic challenge.

Iran's president Mahmoud Ahmadinejad arrived in Istanbul for a two-day visit where the countries will sign a deal to ship more Iranian oil to Turkey.

As a close ally to both Israel and the United States, Turkey has been criticized for accepting the visit, but Turkish officials have asserted that closer ties will put Turkey in a position to broker deals between the aspiring nuclear power and the west.

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