EM positive but slow; Turkey up on local rate cut; primary suffers poor data

By Aaron Hochman-Zimmerman

New York, Sept. 14 - Emerging markets finished a slow, but relatively positive week with an optimistic tone in the face of negative data and a British bank bailout in the headlines.

It may have been the light trading that helped to keep emerging markets buoyant.

"You have to consider there's a lot of people on holiday," a buyside source said.

Despite the good feelings, "high yield and emerging markets bond funds and balanced funds all posted modest outflows," for the week ending Sept. 12, according to EPFR Global.

Volatility was also up slightly as indicated by the VIX index. The index added 0.16 to end at 24.92.

However, "it was a relatively positive week for the asset class," a strategist said, giving a good deal of credit to the surprise interest rate cut in Turkey by 25 basis points to 17.25%.

There was a sense of limited tightening across the sector.

The premium over Treasuries that investors accepted to hold emerging markets debt was seen flat to barely narrower at around 233 bps, according to JP Morgan's EMBI+ index.

The flatness and slowness of the week will probably persist through Monday, as investors are still waiting for the Federal Reserve Bank to ease interest rates, the strategist said.

The two most likely scenarios are a 25 bps cut and a 50 bps cut, the strategist said.

"If they didn't cut rates at all, that would be taken pretty badly," the strategist said.

If emerging markets remains reasonably strong, a 25 bps reduction would be disappointing, the strategist said, adding that the statement which accompanies any action will be important as well.

The Fed should outline what it expects from its actions and may discuss moves it is considering for the future.

Providing there is a Fed rate reduction, "in the near-term a lot of EM would be a reasonably safe bet," the strategist said.

"Sooner or later people are going to get bored of doing nothing," a syndicate official said about the chances of a recovery in the next few weeks.

"Barring any earth-shattering news, and the Fed does what it's supposed to," emerging markets should start to show improvements, the official added.

However the week of the Sept. 17 may be too soon for much activity, said the syndicate source.

As well as watching the Fed, investors will also be focusing on earnings reports from the major investment banks.

"We'll continue to see EM trading sideways or even better," in the coming weeks a buyside source said.

Turkey really cooking

Turkey's rate cut boosted its sovereigns and sent rumors whirling that the country's credit rating would be upgraded.

The five-year CDS was seen trading between 190 bps and 200 bps.

Turkey's sovereigns due 2011 finished up around 109.00 to 109.50. The sovereigns due 2016 finished around 101.75.

The lira continues to rise and has shown good progress against the dollar as well. It ended at 1.260 to the dollar.

"The Turkish lira rallied a lot due to central bank easing," a strategist said.

Turkey may not be done heating up emerging markets.

"Turkey has a lot of money to raise," a buyside source said.

When conditions are right "I would think they want to approach the market," the buysider said.

"That would give a boost to EM."

Elsewhere in Europe, British lender Northern Rock plc declared it is unable to write new loans and requested help from the Bank of England.

Many believed it is evidence credit crunch spillover, but "we just shrugged it off here in the U.S.," a syndicate official said.

South Africa tightens, rand up

After the Turkish rate cut, there is now speculation from South Africa that the central bank may not raise its interest rates in order to maintain its target inflation rate.

The news further strengthened the South African rand against the dollar. The rand closed up 7.164 to the dollar.

The country's sovereigns reaped the benefits as well.

The government's R153 bond was seen trading tighter around 9.24%, as the long-term R157 notes narrowed slightly to end at approximately 8.58%.

"The fundamentals are good ... the companies have exceptional market share," an emerging markets analyst said.

LatAm looking good

In Mexico the legislature is still considering election reforms which would remove influence from big business in the election process.

Supporters of the left-wing Andres Manuel Lopez Obrador who lost the last election to president Felipe Calderon are pushing the legislation.

The reforms deal mostly with campaign advertisements and particularly negative advertising, the New York Times reported.

Mexico's 7.25% sovereign due 2017 was seen trading at 100.9 bid, 101.05 offered,

Mexico's 2019 peso-benchmark eurobonds have warrants due shortly and the sovereigns due 2024 has warrants coming due payable in dollars.

In Argentina spreads have also been tightening.

"A lot of Argentina is oversold," an emerging markets analyst said.

The fundamentals do not justify its performance, the analyst said, adding that it is not likely the market will see much improvement or any new issues ahead of the elections on Oct. 28.

First lady senator Cristina Kirchner is still the front-runner.

Brazil's highly-traded 11% sovereign due 2040 had "a pretty good week," said a syndicate official, who added: "positive, but slow."

The notes ended up at 132.95, up 0.75 on the week which they began at 132.20.

Five-year CDS spreads are also tighter by approximately 15 bps.

Diversifying in Asia

The negative U.S. economic data, which some have speculated would damage Asian exports, should not be a problem, according to a buyside source.

"Asia's pretty much on its own," the source said about Asian isolation from U.S. subprime woes.

"[Asia is] going so fast, the U.S. will hardly have an effect," the buysider said.

With the encouragement of governments, Asian corporations "have been diversifying," the buysider said.

The Philippines' 7.75% notes due 2031 finished Friday at 107.25 bid, 108.25 ask.

Primary hit again by data, healines

In the primary market, emerging markets investors sat on the sidelines again as they continue to wait out the credit crunch with the hope that a Fed cut will spark the new issue fire.

The case for easing the lending rate was bolstered as unhealthy economic data was released by the Fed.

Due to the markets abroad the day was still called a "modest recovery" by a syndicate official; but industrial output in the United States grew only 0.2%, much lower than expected. Retail sales rang in at 0.3% growth, which is lower than the 0.5% expected.

Even after the Fed meets on Sept. 18, when the rate reduction is anticipated, the market will still need some time to figure out its next move, a market source said.

Despite most investors' belief that the Fed will cut rates, stocks only pulled out slight gains over concerns about the economic data and visions of the impact of the subprime crisis in the United Kingdom.

The Dow Jones Industrial Average closed the week at 13,442.52 after climbing 17.64 on the day. The Nasdaq Composite Index picked up 1.12 to end the week at 2,602.18.

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