Emerging markets rally on weak U.S. jobs data; Brazil 2040s score

By Reshmi Basu and Paul A. Harris

New York, Oct. 8 - Tepid U.S. non-farm payroll numbers fueled an emerging market rally Friday, as the news eased market jitters over what direction the Federal Reserve would take in the coming months.

The United States economy created 96,000 jobs in September, falling short of the expected 148,000 new jobs.

"The market rallied from where it felt like the market was very long and nervous," said a trader.

"Vene was up 2½ points on the back end," he added.

The Venezuela bond due 2027 gained 2.40 points to 102.60 bid.

"Panama always lags up and down," noted the trader. Panama's bond due 2027 fell ¾ point to 107 bid. And the trader saw Peru 10 basis points tighter.

Overall, emerging market paper was firmer. The Russia bond due 2030 was up 0.374 to 97.812 bid. Mexico's bond due 2008 added 0.45 to 114.65 bid while its bond due 2026 rose 1¾ to 151¼ bid.

The JP Morgan EMBI+ Index surged 0.85%. Its spread to Treasuries tightened six basis points to 397 basis points.

Brazil's inflation down, bonds up

Along with the soft U.S. jobs data, more good news came out of Brazil as the rise in the country's consumer price index slowed in September. The Brazilian Census Bureau reported that its IPCA CPI rose 0.33% last month, compared with a rise of 0.69% in August, coming in below forecasts.

The Brazil C bond rose 0.812 to 100 bid in trading Friday while the bond due 2040 added 2½ points to 114½ bid.

Behind the payroll numbers

The weak payroll numbers quieted concerns that the Fed would act more aggressively. Now the rally looks like it could continue, at least until the U.S presidential election in November, according to the trader.

"It confirms the shift. People have to be invested in fixed income," said the trader.

"This is the last job report before the [U.S.] election.

"I think the market will remain well bid before the election. I think people will make a decision on the outcome.

"I've heard people say that [John] Kerry is bond good and equity bad and [George] Bush is the reverse.

"So I think people will reassess once the election happens, but until then I think we are on remote."

The story behind the numbers is that the U.S. economy is growing at a mediocre pace, according to Alberto Bernal, head of Latin America research for think tank IDEAglobal.

"The fact that this is the case implies that the velocity of the adjustment of the U.S. monetary policy is going to remain gradual. That's a very important issue for people who are involved in the emerging markets," he said.

Furthermore, the data is a boost to Latin America. Other positive factors for the region include high commodity prices, the gradual adjustment in global interest rates and surging domestic demand.

"It is a perfect environment for high growth in the region. The question is whether or not these countries are going to use this opportunity to fix the lingering problems that all of those economies continue to have," Bernal added.

The problems include pension loads in the region and structural tax reforms.

"It's much easier to take tough decisions in the good times in terms of the structure of the economy. And that is very relevant."

Nonetheless, slow job growth in the United States does translate into good demand in the bond market, said Bernal.

"The adjustment of rates will be gradual. Therefore, the bond prices for the Latin American region will remain supported at current levels. And current levels are at record high levels," he told Prospect News.

But Bernal said he is not comfortable arguing that emerging market debt can go much higher.

"These prices are extremely high. And if any bad news from the region takes place, the sell-off could be quite intense."

Bernal recommends holding present positions for the time being but not adding additional positions at the current levels.

Still betting on better Argentina offer

In Argentina, international investors are still anticipating that the country will come up with a better restructuring offer even though the Argentinean government reached an agreement with local pension funds on Thursday to restructure $17 billion in defaulted debt.

The deal means little because the market had priced in that the local pension funds were going to participate, according to Bernal.

"The real issue here is that they don't have a choice. International investors have more choices because they could, for example, sue the government in New York courts.

"However, the Argentine pension funds do not have that ability, so no one was doubting that they would participate in whatever deal was going to come," he said.

The market continues to price in that president Nestor Kirchner will better the offer to 32 cents from 26 cents.

"The market continues to bet on that issue. Otherwise, the market would not be where it is right now," added Bernal.

The Argentine bond due 2008 was unchanged at 31.10 bid.

Ahmsa up

Latin American corporates were flat at the close of London markets on Friday.

However, Mexican steel company Altos Hornos de Mexico (Ahmsa)'s bond due 2004 was up 3½ to 37 bid, 38 offered.

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