Emerging markets weaken; data, equities drag prices; African Development Bank, Banco Cruzeiro price

By Aaron Hochman-Zimmerman

New York, Feb. 15 - Emerging markets continued to bounce around on the final day of a volatile week.

On what a trader called an "expectedly choppy" day, the shortened session Friday took a toll on prices as Brazil's bonds due 2037 led the way down with a loss of 1.2.

However, the primary market jumped up from its mid-winter slumber as deals from Cote d'Ivoire's African Development Bank and Brazil's Banco Cruzeiro do Sul SA priced for a total of $600 million.

As a sector, the week ended Wednesday saw outflows of $302 million, according to data compiled by EPFR Global.

The difficult trading conditions are anticipated to continue through the four-day Presidents Day week in the United States, a strategist said.

"EM continues to dance the tune of the Dow [Jones Industrial Average]," he said.

The data releases expected, including the U.S. consumer price index, are "only going to show even weaker numbers," he said.

Volatility dipped sharply in the morning but made came back to end lower by only 0.52 at 25.02, according to the VIX index. The index is a frequently used yardstick of market volatility.

On the disappointing economic news, Treasuries came bouncing back as emerging markets widened by 3 basis points to a spread of 275 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold money in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 2 bps with a spread of 299 bps.

The diversified index has a less strict liquidity rule for inclusion.

Prices mixed in volatile emerging Europe

Trading in emerging Europe whipped around on Friday in response to data from the United States.

"It snaps back and snaps forward, back and forward," a trader said about the volatile market.

Prices were mixed and investors were content to keep their cards on the table before the long weekend.

Russia's ruble may be used to conduct oil transactions with Iran, Iran's ambassador to Russia said, according to the RIA Novosti News Agency.

The ruble was seen trading at 24.587 to the dollar.

Also, Russian consumer prices have stabilized, said the head of the presidential expert council, Arkady Dvorkovich, according to the Itar-Tass News Agency.

Dvorkovich claimed that economic stability and not recent price freezing has caused the rate of price increases to match February 2007 rates.

The Russian bonds due 2030 fell 0.2 to 113.875 bid, 114 offered.

In Ukraine, the team negotiating the terms of fuel payments to Russia's OAO Gazprom will recess until early in the week of Feb. 18.

Meanwhile, opposition leader and chair of the Regions Party, Viktor Yanukovich, sent an open letter to NATO asking the alliance not to consider the Ukraine for membership, according to Itar-Tass.

The country's president, Viktor Yushchenko, and prime minister Yulia Timoshenko are in favor of joining.

The Ukrainian government bonds due 2016 were flat at 99.875 bid. The bonds due 2013 were lower by 0.5 at 106.75 bid.

South Africa's economic outlook will worsen over the course of 2008, according to 85% of managers polled in a Merrill Lynch fund manager survey, according to the Times of South Africa.

The lack of reliable power poses the greatest risk to the South African economy, the survey found.

The South African bonds due 2017 were quoted unchanged at 120 bid.

Turkey's overseas contracting businesses will make a push for a larger percentage of international construction contracts, said state minister Kursad Tuzmen, according to the Turkish Daily News.

Turkish contractors have won $100 billion in contracts but hope to have $500 billion by 2023, Tuzmen said.

The push hinges on the support from Turkey's banks, he said.

The Turkish sovereigns due 2030 dropped 0.375 to 154 bid, 154.125 offered.

Also in emerging Europe, a new country may soon be added to the roster of emerging markets.

Kosovo is expected to declare independence before investors return from the weekend.

Prime minister Hashim Thaci announced his government will respect the rights of all minority groups in a Kosovo independent from Serbia.

The United States and most countries of the European Union are expected to recognize Kosovo, but Russia and the Belgrade government oppose the split.

The winds of independence may be blowing from Kosovo the provinces of Abkhazia and South Ossetia in Georgia, where president Mikhail Saakashvili strongly voiced his opposition to any fracture of the country, according to RIA Novosti.

Asia weaker but hanging on

"It's very choppy," a trader said about Friday's trading and the week in general.

During the abbreviated session on Friday "we printed new wides on the Asia high-yield [index] at 572 bps," he said.

The index was wider by about 30 bps.

"It's fallout from weakness in the European credit market," he said, adding that much of the pressure on Asian trading was coming from European accounts.

"The softness does continue," he said, even as mixed flows saw "some selling of higher quality paper."

"There hasn't really been too much sign of panic," he said, which bred the feeling that Asia is "holding its collective nerve better than some other markets are."

In the Philippines, shortly after a plot to kill president Gloria Arroyo was uncovered by security services, protestors lined the streets of Manila to call for her resignation.

As federal troops stood by, the crowds accused Arroyo of corruption, leveling charges that her husband accepted bribes from a Chinese company.

Elsewhere, the government plans to spend a greater share of its budget for infrastructure and social programs earlier in the year than had been expected, according the Manila Times.

Arroyo announced that PHP 200 billion has been earmarked for infrastructure spending.

The Philippine government bonds due 2030 were better by 0.5 to trade at 130.25 bid, 130.75 offered.

Indonesia's sovereign bonds due 2018 lost 0.25 to trade at 103.5 bid, 104 offered.

In Pakistan, three soldiers were killed by a roadside bomb in the volatile tribal area near the northern border with Afghanistan, reported the BBC.

Parliamentary elections are scheduled for Monday.

The lightly traded Pakistani bonds due 2017 were seen unchanged at 83 bid, 87 offered.

In India, authorities raised the price of gasoline and diesel fuel by 2 rupees and 1 rupee, respectively, reported the BBC.

Due to government subsidies, inflation has been kept low.

The rupee was seen trading at 39.65 to the dollar.

Oil was seen trading at $95.69 per barrel.

Two price in primary

Even on an erratic day in trading, rumors about deals to come were kicked up in the primary as the African Development Bank (Aaa/AAA/AAA) priced a $500 million three-year note at 99.84 with a coupon of 2¾%.

The deal priced at a spread of Treasuries plus 93 bps.

BNP Paribas and Morgan Stanley acted as bookrunners for the deal.

The notes will mature on Feb. 25, 2011.

The African Development Bank is an Abidjan, Cote d'Ivoire-based development bank.

Brazil's Banco Cruzeiro do Sul SA (Ba1) priced a $100 million 18-month senior unsecured note at 99.651 with a coupon of 7¼%.

Initial guidance was set at 7½%.

BCP Securities acted as the bookrunner for the bonds, which mature on Aug. 20, 2009.

Banco Cruzeiro is a Sao Paulo-based retail and commercial bank.

Also, Russia's OAO Gazprom is rumored to be planning a roadshow for a $2 billion offering, a strategist said.

The roadshow is expected sometime in April, "when everything is better," the strategist said with a carefully measured amount of optimism.

Jamaica's non-deal roadshow will be held on Feb. 26 to Feb. 28, a syndicate official said.

"They haven't put out their budget yet," he said regarding the size of the expected issue.

The fiscal year ends on March 31, he said

The issue amount should be available "I imagine mid-March," he said.

During the week of Feb. 11, "EM has been so quiet; there hasn't been any deal flow," he said. However, "there could be a couple of things next week," he said about the week of Feb. 18.

Quiet LatAm sinks with equities

"It's super quiet," a syndicate desk official said about the half-day on Friday.

"The market remains so choppy," he said.

Prices were off as the secondary market tracked equities lower until its early close.

In Argentina, the mayor of Buenos Aires, Mauricio Macri, announced plans to invest $2.5 billion in the city's subway system to deal with rising traffic congestion, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 fell 0.5 to trade at 88.3 bid.

The government of Venezuela claimed Exxon Mobil Corp.'s interest in the country only amounted to $1.2 billion rather than the $12 billion that was frozen by courts in the United States, United Kingdom and the Netherlands.

President Hugo Chavez has threatened to cut oil shipments to the United States over the legal battles, but many believe his government is too dependent on dollars.

The Venezuelan 9¼% government bonds due 2027 lost 0.25 to trade at 98.9 bid, 99.25 offered.

Venezuela "has been very weak on the whole news about PDVSA," a trader said.

Brazil's 11% sovereigns due 2040 were lower by 0.4 at 132.2 bid. The 7 1/8% bonds due 2037 were worse by 1.2 to trade at 105.25 bid, 105.9 offered.

Brazil's five-year CDS "is at 158 [bps], then at 155 [bps], up and down, up and down," a trader said.

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