Emerging markets lose for third day; primary activity quiet; spreads damaged by risk aversion

By Aaron Hochman-Zimmerman

New York, June 17 - Emerging markets suffered through another day of consolidations spurred by weakness and profit-taking in the major markets.

Treasury yields cooled and investors withdrew risk to allow the market to adjust to its recent gains.

The primary market seemed to have shuddered under the pressure as investors searched for news about pending deals from Brazil's Banco Cruzeiro do Sul and Lithuania.

The lower Treasury yields, however, may encourage Brazil and Colombia to collect their teams of bookrunners before yields return to their old highs, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

On the trading side, Venezuela gave way to Argentina, which allowed itself to slip farther than its fellow high-beta credits in Latin America.

Argentina's discount bonds due 2033 lost 2 points.

Elsewhere, equities in the United States finished mixed, but volatility managed to shed 1.14 points to close the day at 31.54, according to the VIX index. The index is a frequently used gauge of market volatility.

However, as a sector emerging markets took one of the hardest hits in recent sessions as it was dragged wider by 16 basis points to a spread of 447 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm drifts wide

Latin America had "some negative drift going," said IDEAglobal's Alvarez. "I don't want to say it's sustained," he said, but more like "drips of negativity."

The external markets were again the sources of the contagion.

Many asset classes were "overbought" so the selling "from a technical standpoint is definitely healthy," he said.

Still, "we are widening, which is important," he said, and "it proves the same point that you're tied risk-to-risk to the U.S. equity market and that can or cannot be positive."

Oil traded as low as $69 per barrel as Venezuela continued to fall on the commodity trade and "has been the weaker link for the past few days," Alvarez said.

The 9¼% Venezuelan sovereigns due 2027 gave back 5/8 point to 68½ bid, 69 5/8 offered.

Argentina was harder hit on Wednesday, but over the recent spate of widening, it has been the one of the stronger sovereign issues.

The 8.28% Argentine discount bonds due 2033 sank 2 points to 45 bid, 46¼ offered.

Brazil, Colombia to primary?

Brazil and Colombia were heard discussing "dollar issuance ahead," Alvarez said, which usually means "sooner rather than later."

The two countries have to look at the larger picture, including the recent drop in Treasury yields to near 3.6% from 4%, he said.

"I'd be looking with a lot of intent to pull the trigger," he said.

The question remaining is of maturity.

"No one has tested beyond 10 years," he said.

There is the possibility of trying a range with a reopening or trying to come shorter with a five- or seven-year issue.

Still, beyond 10 years is "uncharted," he said.

The 7 1/8% Brazilian bonds due 2019 fell 5/8 point to 97 7/8 bid, 99 offered, while the 7 3/8% Colombian bonds due 2019 were lower by 0.2 point at 104¼ bid, 105½ offered.

Emerging Europe hit by equities

Emerging Europe was shaken by the low risk tolerance in the major markets and slid wider on Wednesday.

Meanwhile, at the BRIC summit in Yekaterinburg, Russia, president Dmitry Medvedev agreed to closer trade and energy ties with China, reports said.

Even as Medvedev and president Hu Jintao discussed energy policy, Russia's OAO Gazprom said it would not begin shipping gas to China as scheduled, in 2011, until a price is determined.

Meanwhile, China's Eximbank will offer a line of credit to Russia's Vnesheconombank.

Also on a diplomatic trip to Luxembourg, Ukraine prime minister Yulia Tymoshenko asked the European Union for another $4 billion loan to bolster its energy budget to ensure a smooth flow of gas from Russia to the West.

The Ukrainian national energy firm NJSC Naftogaz Ukrainy said it needs to fill its reserve tanks with 30 billion cubic meters of gas to ensure an adequate supply during the winter.

In Turkey, the government continues to move forward without the International Monetary Fund.

Turkey would become "the best G-20 member," in terms of debt to GDP ratio, if a plan under development by the Economy Ministry is adopted, said economy minister Ali Babacan, according to the Hurriyet Daily News.

Babacan's plan combines tax cuts, investment incentives and stimulus spending to reignite the economy.

Asia consolidates

Asia was lower as well on Wednesday as credit levels were pushed down in tandem by Wall Street weakness.

Meanwhile, leaders from the region met in Manila, Philippines, at the headquarters of the Asian Development Bank to discuss renewable energy.

The fourth annual summit to deal with the environment and energy security issues pledged to double the current annual goal of $1 billion in investments into clean energy.

"While $2 billion annually is a significant commitment, this represents only a fraction of the region's financing needs in the area of clean energy. But we expect that this contribution will catalyze significant additional resources from the private sector, carbon markets and other sources," said ADB president Haruhiko Kuroda.

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