Emerging markets pressured by externals; high-grade credits hold on; South Korea to issue dollars

By Aaron Hochman-Zimmerman

New York, Sept. 4 - Emerging markets began to feel the weight of the external markets again on Thursday as the Dow Jones Industrial Average was walloped and ended lower by 344.65, or 2.99%.

"People are looking at what's taking place in the equity markets," a strategist said.

Meanwhile, Asia remained mildly ahead of the performances turned in by credits in emerging Europe and Latin America, but while prices were relatively stable, spreads were pulled wider.

Argentina led the losers through trading by dropping 1.3 points from its benchmark discount bonds.

However, in the secondary, the high-grade credits such as Mexico began to show a stronger correlation to stable U.S. Treasuries.

In the primary, Asia took the torch back from Turkey as South Korea announced a dollar-denominated 10-year deal.

In the broader market, the equity massacre sent volatility soaring by 2.60 to 24.03, according to the VIX index. The index is a frequently used measure of market volatility.

Elsewhere, a difficult day on Wall Street pulled emerging markets wider by 9 basis points to 322 bps, according to JPMorgan's EMBI+ index. That move took the spread to within 6 bps of the year's wide in March. The EMBI+ determines the amount of extra yield investors will accept to hold assets in emerging market debt.

Emerging Europe heads lower

Emerging Europe, where much of the recent widening began, continued to struggle on Thursday.

Many investors noted that the recent political squabble between Russia and its former Soviet allies Georgia and Ukraine have not shaken established investors, but turmoil may prevent the flow of fresh money.

A tumbling ruble and stumbling commodity prices have also translated to losses for Russian paper.

The ruble was seen trading at 25.4720 to the dollar.

The Russian sovereign bonds due 2030 dropped 0.75 point to 110.625 bid, 111 offered.

In Ukraine, prime minister Yulia Timoshenko blasted her former orange revolution ally, president Viktor Yushchenko, as the government teetered on the verge of collapse.

"President Yushchenko killed the coalition persistently and consciously," Timoshenko said in a speech on Wednesday, according to the Itar-Tass News Agency.

Timoshenko also clarified battle lines that will likely become more heated as the presidential elections of 2010 near.

"The president has declared a war on me in connection with the upcoming presidential election," she said in the speech.

Investors digest Turkey's new issue

Turkey's new issue will be watched by many as a gauge for the new issue from South Korea, a syndicate official said, as the new Turkish bonds widened on Thursday.

Turkey's fresh paper initially caused a stir in the market, but on Thursday investors were already warming to the credit.

"They'd just bring the deal within the curve and move on," a strategist said, "despite that it's fairly interesting that the market was able to take the issue OK," he said.

The new Turkish bonds due 2019 slid 0.25 point to 99.375 bid, 99.625 offered.

The benchmark bonds due 2030 gave up 1 point to 150.5 bid, 150.75 offered.

LatAm lashed by externals

Latin America was smashed again on Thursday as the old foes of the developed markets continued to reassert themselves in the emerging markets, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Possibly this could be exacerbated by weak U.S. job numbers tomorrow or there could be a bounce," he said, noting that external factors of liquidity and equity weakness are harder to judge than local Latin American issues.

In Argentina, news of the $6.7 billion debt payments still "hasn't done much for them," Alvarez said.

Upon the news of the Paris Club debt repayment, the Paris Club itself announced it will assist Argentina with its payments, according to the Buenos Aires Herald.

"We consider that Argentina is taking a good decision if all of this is confirmed and implemented," said Paris Club chairman Xavier Musca in the report.

"Nothing can be decided without a unanimous agreement of all the creditors. There will be a (scheduled) meeting on Sept. 15 and Argentina's debt will be discussed," he said.

In addition to the one-sixth of its reserve it will use to pay the debts, Argentina reached into its pockets for $900 million in order to renationalize the air carrier Aerolineas Argentinas.

The 8.28% Argentine discount bonds due 2033 sank by 1.3 points to 71.75 bid, 72.4 offered.

In Venezuela, a debate goes on about how closely bond prices are linked to oil, but falling prices cannot be good for the oil exporter.

"Vene has been mostly on the downside," Alvarez said as it traded 16 bps wider.

The 9¼% Venezuelan bonds due 2027 dropped 0.95 point to 90.5 bid, 90.95 offered.

Also, oil producer Brazil, which was recently invited into OPEC by Iran, "may mull on that," Alvarez said.

However, what's more relevant is Brazil's "upcoming or theoretical ability to produce more exportable oil," he said.

Light sweet crude was seen trading at $107 per barrel.

The 7 1/8% Brazilian bonds due 2037 fell 0.45 point to 110.5 bid, 111.3 offered.

Elsewhere, fellow investment-grade credit Mexico showed a bright spot as the country along with the other high grade names, such as Chile, have been "coming back," Alvarez said.

They are "using their ratings as a buffer for what's going on," he said, adding that their ratings link them more closely to traditionally stable U.S. Treasuries.

The 5.625% Mexican sovereign bonds due 2017 added 0.05 point to 101.65 bid, 101.8 offered.

South Korea plans new offer

The Republic of Korea (A2//A+) announced a dollar-denominated 10-year global bond offering.

Barclays, Goldman Sachs, HSBC, Lehman Brothers, Samsung Securities and UBS will act as bookrunners for the deal from a $5 billion issuance program.

A roadshow for the deal will be held on Monday in Singapore and London, on Tuesday in Hong Kong and Boston and on Wednesday in New York.

Proceeds from the sale will be used to purchase foreign and domestic currency, for deposits and loans to foreign and local banks as well as to refinance debt.

"That's going to be a good deal," a strategist said.

Asia hangs on

Meanwhile, in Asian trading issues held reasonably firm as traders wait to see how the market will treat the new Korean bonds.

"It's good to have a little bit of supply, I guess," a trader said.

Flows continued to stay in the moderate region on Thursday as "there has been a reasonable amount of buying the last week or so and that's why things have held so well," the trader said, but overall "it's still a pretty nervy market at the moment."

"The only real sort of strong spot has been on the sovereign cash side, and that's held up pretty well," he said.

In the Philippines, commercial borrowing is expected to triple in 2009, the Department of Finance said, according to the Manila Times.

The government is expected to issue $1.5 billion in sovereign bonds next year, compared to the $1 billion program established for 2008.

Among other things, "that's dependent on the local markets," the trader said.

"Things are changing so fast in this market," he added.

The Philippine government bonds due 2030 slipped 0.125 point to 129 bid, 129.5 offered.

Meanwhile in Indonesia, as expected the board of governors of Bank Indonesia raised the bank's key interest rate by 25 bps to 9.25%.

"Domestic inflationary pressure remains strong, mainly because of rapid growth in aggregate demand," said bank governor Boediono in a statement.

"For now, pressures from escalating energy, foodstuff and world commodity prices have eased, but nevertheless warrant continued vigilance," he added.

Inflation of the rupiah hit 0.51% in August compared to 1.37% in July. Still, the inflation rate for 2008 through July was 9.4%, compared to a rate of 6.51% during the same period of 2007.

"After taking account of the various risks and inflationary pressure expected to last to the end of the year, Bank Indonesia forecasts CPI inflation at end-2008 within the range of 11.5%-12.5%," the bank said about year-over-year inflation.

The rupiah was seen trading at 9,346.91 to the dollar.

The Indonesian government bonds due 2017 added 0.5 point to 101.5 bid, 102 offered.

Also in Asia, volatile Pakistan's bonds due 2017 were quoted at 60 bid, 64 offered.

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