Emerging market trading flat; City of Ostrava prices; Russia' banking woes

By Paul A. Harris and Reshmi Basu

New York, July 19 - Friday's rally in emerging market debt did not carry into Monday's session as investors awaited upcoming testimony from Federal Reserve Chairman Alan Greenspan for more clues as to the velocity of interest rate hikes.

"Nothing much going on," said a trader. "The EMBI tightened by two points."

The Brazil bond due 2040 fell half a point to 95 bid while the C bond was down 0.125 to 95 bid.

In general, emerging market trading is taking its cue from U.S. data or anything else that illustrates the strength of the U.S. economy and the size of the inflation threat. Geopolitical risk has been less of a concern of late.

"There's really nothing happening in the countries that steal the headlines," said a syndicate source.

"There's not that much domestically that people are looking at.

"People are continuing to look at the external issues as being the dominant ones for emerging markets," added the source.

Greenspan delivers his semiannual testimony on monetary policy before the Senate on Tuesday and again to the House of Representatives on Wednesday.

Also, Brazil's Central Bank monetary policy committee meets this week. Most expect the Central Bank to keep the 16% Selic interest rate steady.

In primary action, the City of Ostrava, Czech Republic, priced €100 million of 10-year bonds (A3/A-) at par to yield 4.556% via Deutsche Bank.

Adding to the pipeline, China's Ministry of Finance plans to issue $1 billion dollar- and euro-denominated bonds

And Hungary plans to issue a sovereign bond this year.

One of the most notable deals in the pipeline is from a Russian company. Gas producer Gazprom's dollar-denominated benchmark-size deal via ABN Amro Holding NV, Merrill Lynch & Co. and Morgan Stanley is massively oversubscribed, according to a market source.

Korea looms in Asian issuance

Looking at issuance this year, it seems like a lot of the supply has come from Korea, according to the syndicate source.

"And countries like Malaysia and China, and Thailand are slightly active.

"It's hard to say exactly why we've seen so much supply," added the source.

"I think some of it has to do with the fact that in Korea you had one-time events, you had the privatization in electricity. And all those companies decided to come.

Russia's banking woes prematurely over?

Russia's banking crisis has been less of an issue in recent sessions for investors as the country's paper has traded up with the emerging market rally.

But participants say there is little information available as to how widespread the liquidity problem is. Evidence that the difficulties have not gone away could again derail Russia's paper.

"I think the only thing we know about the Russian banking system is that we don't know very much," said an emerging market analyst.

"So far it seems that the banking crisis has been contained to just a few small trouble spots but the problem is that we have no idea how deep the problem runs.

"The fact that the system is so fractured into so many different banks, and that a lot of those banks don't appear to be much more than shell companies, means you have to be very skeptical," he said.

"But because the central bank has so much in reserves, it could put together a credible bail out of troubled banks if it had to, so long as the crisis doesn't go systemic.

"I think you have to assume that the banking system rears its ugly head again at some point, but so long as there are no signs that a system-wide collapse is brewing or that the Central Bank would be unable to intervene, it's difficult to short Russia when it's enjoying so much support from the overall rally in EM debt."

Investors have been reminded that there are still systemic weaknesses, according to the syndicate source.

"People feel a little calmer about the big banks and that the Russian authorities are making good attempts to not just to stabilize the problems that they had a few weeks ago, but to continue to improve the system.

"If you look back over the last month or so, Russia hasn't gone up as much as Brazil. It couldn't because it's trading at much tighter levels to begin with.

In Monday's session, the Russia bond due 2030 was bid at 93.875, up 2.0.

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