Emerging markets tighter; political risk weighs on emerging Europe; primary bond activity comatose

By Aaron Hochman-Zimmerman

New York, Aug. 15 - Emerging market bond spreads tightened to end a strong week, which saw the dollar's rise undercut the oil prices that have hampered emerging economies.

Trading was slow, and investors dragged toward the weekend; however, yields outside of emerging Europe were still generally winding tighter.

The tone generated on the slow flow was positive and some believe that if the market remains on a similar trajectory, a reopening of the primary market might occur in the week beginning Aug. 18.

In the broader market, equities' modest success on Friday was enough to push volatility below 20.00 as it ended lower by 0.76 at 19.58, according to the VIX index. The index is a frequently used gauge of market volatility.

World's eyes on emerging Europe

Many bonds tied to emerging European countries involved in the conflict in the Caucasus had been holding steady during the week of fierce fighting.

However, the market finally saw some widening for the hold outs as investors cleaned up portfolios ahead of the weekend.

Meanwhile in Georgia, U.S. secretary of state Condoleezza Rice met with president Mikhail Saakashvili in support of the Tbilisi government.

Saakashvili agreed to a ceasefire, which had already been signed by Russia's president Dmitry Medvedev and France's president Nicolas Sarkozy, as the United States worked to contain the Russian presence in the former Soviet republic.

Russia gave no indication a withdrawal was imminent.

"Bullying and intimidation are not acceptable ways to conduct foreign policy in the 21st century," president George Bush said about the Russian invasion.

German prime minister Angela Merkel weighed in, calling the Russian response to the conflicts between Georgia and its breakaway republics "disproportionate."

In addition to words, the United States announced that after weeks of negotiations it has struck a deal to maintain defensive missile sights in Poland, a former Warsaw Pact nation and current E.U. member.

Russia considers the anti-ballistic missile systems a threat to its security and said the installations open Poland to attack, reports said.

Still, the West insists the shield is to prevent attacks potentially from Iran.

Despite a recent high-water mark in post-Cold War tensions in an oil rich region, crude prices continued to fall as the dollar continued to rally back.

Also adding to supply, the United Kingdom's BP announced that it reopened its South Caucasus pipeline, which runs from the Caspian Sea to Turkey by way of Georgia.

In Turkey, while prime minister Recep Tayyip Erdogan was meeting with Russian president Dmitry Medvedev, president Abdullah Gul met with Iranian president Mahmoud Ahmadinejad in Istanbul.

The trip was the first official visit by Ahmadinejad to Turkey. He will meet with Erdogan when he returns from the next leg of his trip in Tbilisi.

Argentina outperforms LatAm

Latin America traded tighter on Friday on low summer volumes as equities were mixed.

"Argentina did well this week; it tightened up considerably," a syndicate official said.

Bottom feeders and a vaguely described bond buyback program helped Argentine credits fight back from dwindling tax revenues, rising inflation and the resulting downgrades by Standard & Poor's and Moody's Investors Service.

Elsewhere in Latin America, over the course of the week Venezuela was mixed to better even as the dollar roared back and commodities, including oil, were falling.

"Argentina and Venezuela would suffer most from a sustained slump in global grains and crude oil prices," the Buenos Aires Herald commented on Friday.

Light sweet crude was seen trading below $112 per barrel.

Meanwhile, commodity producer Brazil, saw its currency, the real, retreating on Friday.

The real was seen trading at 1.639 to the dollar.

Asia closes quietly

Asia, also traded tighter with a positive tone, but with very low volumes, as Asian investors were preoccupied by the Olympics on a summer Friday.

In the Philippines, overseas remittances were up 30% year over year in June to reach $1.5 billion, according to a central bank press release. The jump is the highest since 1989.

During the first six months of the year, $8.2 billion in remittances have come into the Philippines, up 17.2% from the same period in 2007.

Bank governor Amando Tetangco attributed the rise in remittances to a higher number of overseas workers.

"Deployed Filipino workers rose by a hefty 33.5% to 640,401 from 479,725," the release said.

The highest levels of inflows came from the United States, Saudi Arabia and the United Kingdom.

The Philippine peso was seen trading at 45.241 to the dollar.

In Indonesia, many in the business community are unsatisfied with the government's commitment to infrastructure, according to the Jakarta Post.

"The allocated budget for infrastructure is only 3%, when the country actually needs at least 6% to stimulate high economic growth. After all, investment and growth run commensurate to infrastructure development," said Bambang Soesatyo, head of the Indonesian Chamber of Commerce and Industry's Fixed Fiscal and Monetary Committee, in the report.

Others feel the problems are as much in the execution and management of government projects rather than the funding.

In Pakistan, president Pervez Musharraf, through a spokesman, denied widespread reports that he will resign.

If he does not resign, impeachment proceedings against him are likely within two weeks.

Primary waits for Monday

The primary market closed the week with no fanfare on Friday, but some investors are more hopeful for Monday.

Volume has been puddle-thin in trading, but sinking oil prices and bouts of strength in equities left some with a glimmer of hope for new issues.

Investors often say that a stable platform of market tone over the course of a few days is necessary before issuers hold out the for sale signs.

If the slow, but positive mood in the market prevails on Monday, the stage could be set for new issuers later in the week, market sources said.

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