Early gains lost by mid-day; Argentina leads gains; Odebrecht prices $200 million

By Aaron Hochman-Zimmerman

New York, Oct. 11 - Emerging markets lost some early gains as equities fell off and volatility spiked Thursday afternoon.

Argentina took the lead in trading, adding 1.15 to its benchmark bonds.

The primary saw one $200 million deal price from Brazil's Construtora Norberto Odebrecht SA, but plenty of others lined up in the pipeline.

Emerging markets trading did not suffer too much over the course of the day and a portfolio manager was quick to dismiss a blemish on what has been a strong week.

"I don't make a whole lot out of it," the manager said, adding that he prefers to watch larger trends than daily market whims.

"We've had this big uptrend and people have made a lot of money and people are taking chips off the table," he added.

Most market watchers are still optimistic, at least in the short-term.

"All of these markets have been benefiting from the pick up in risk appetite," an emerging markets analyst said.

With equities as a driver, the dissipation of the recent market stress has sent liquidity levels back to pre-crunch levels, but it is a fragile recovery, he said.

"If we get some more stress in part in equity markets either because of risk aversion returning or people start thinking about the U.S. and European economy that will halt and probably reverse this current strengthening," he said.

The VIX index was trailing off during the first half of the session, but more than made up for what it had lost. The accepted yardstick of market volatility closed the day up 2.21 at 18.88.

Despite the surprise surge in volatility, emerging markets as a whole held its composure.

JP Morgan's EMBI+ index ended the day tighter by 3 basis points to close with a spread of 185 bps.

The index gauges the amount of extra yield investors are demanding to keep money in the emerging markets.

Europe avoiding pitfalls

In large part liquidity has washed over emerging Europe and trading has been calm, but encouraging,

However, there are some countries which are still afflicted by the liquidity drought.

"We much remind ourselves once more that these [countries] are not homogenous," the analyst said.

Kazakhstan is slowly leaving its banking crisis behind, but up north in the Baltic and south in the Balkans there are countries waiting for conditions they can call a recovery.

"Latvian currencies are at elevated levels," he said, adding: "Liquidity in Estonia has not returned to pre-crunch levels."

Romania and Bulgaria have faced similar currency and liquidity battles. In Romania, high inflation rates have sparked talk of rate hikes from the central bank.

Still Romania is looking for banks to bring a 10-year sovereign eurobond worth over €500 million.

"Overall I guess the picture is looking a little bit more constructive," he said, but all eyes are on the United States and developed Europe to see if those economies will weigh down the emerging markets.

If the world suffers severely enough, even another rate cut from the Federal Reserve Bank may not be enough, he said.

Also in Europe, Turkey's relationship with the United States continues to disintegrate.

The foreign relations committee of the U.S. House of Representatives voted to approve a resolution labeling the deaths of Armenians in Turkey in World War I as genocide. The Turkish government condemned the resolution claiming it will strain relations between the two allies which have a history of strong military cooperation.

The Turkish ambassador to the United States, Nabi Sensoy, was recalled over the tensions. The government claims the move is temporary, but it added gas to the fire of conflict between the two NATO members.

Turkish prime minister Recep Tayyip Erdogan also said parliament would hold a vote to determine if it will allow the Turkish military to pursue Kurdish separatists within the boarders of Iraq after Ramadan which ends Friday.

Turkey's government bonds due 2030 were seen trading off 0.12 at 157.48.

Argentina, LatAm advance with equities

Latin American trading showed some progress as equities rallied early outside the United States, but fell off later in the day.

Profit taking late in the session may have cut some of the gains made during the first half of the session.

Trading was also forced to share the spotlight with the primary as $200 million priced from Brasil's Construtora Norberto Odebrecht SA and Mexico's San Luis Corporacion SA de CV announced plans for a new $275 million bond.

Politics have played less of a roll in historically impulsive sovereign prices in Argentina which took in the biggest gains amongst the high-betas on the day in trading.

The Argentine 8.28% notes due 2033 picked up 1.15 to close at 94.40 bid, 94.95 offered.

Brazil's equities and currencies both showed strong rallies but bonds were left out of the fun.

The celebrity 11% sovereign due 2040 lost just 0.10 as it closed at 133.90 bid, 133.95 offered.

Asia flat to weak

Asia traded flat as it has in past months been able to keep itself separate from volatility in the west.

Asian markets may have the chance to preserve that separation as Thursday afternoon's volatility spike came the day before markets in Indonesia are closed for a national holiday.

The Indonesian sovereigns due 2017 gained 0.12 to close at 105.25 bid, 105.50 offered.

The Philippines' sovereigns, which have gained on the coattails of the peso in recent sessions, added approximately 0.25 in trading Thursday.

Lively primary prices one, adds to calendar

In the primary market, only one deal managed to price, a $200 million offering from Construtora Norberto Odebrecht.

But others are adding their names to the calendar.

Deals are lining up to take advantage of the calm after the rough credit crunch of this past summer. A benchmark deal from a corporate issuer in the United Arab Emirates along with a possible sovereign issue from Romania are expected.

Construtora Norberto Odebrecht priced its $200 million in 10-year senior unsecured notes (BB/BB+) at 98.282 with a coupon of 7½% to yield 7¾%.

The deal, sold through Odebrecht Finance SA, priced on the tight end of talk for a yield between 7¾% and 7 7/8%. Talk had been revised downward from the original 8%.

Deutsche Bank and Credit Suisse brought the deal.

The bonds are callable after five years at a premium, which steps down to par over three further years.

Proceeds will be used to bolster investments into the company's subsidiaries.

Odebrecht is a Bahia, Brazil-based engineering and construction company.

United Arab Emirates' Ras Al Khaimah Investment Authority has asked Credit Suisse, HSBC, and NBD Investment Bank to act as bookrunners for its debut benchmark dollar-denominated senior sukuk.

The offer will be guaranteed by the government of Ras Al Khaimah.

Rakia is an investment company based in the Ras Al Khaimah, United Arab Emirates.

Meanwhile Romania is searching for managers to bring a possible €500 million 10-year sovereign bond (Baa3//BBB).

And Mexico's San Luis Corporacion SA de CV announced plans to offer $275 million 10-year bonds (B2).

The proceeds will be used to refinance existing debt.

San Luis Rassini is a Mexico City-based auto parts manufacturer.

Argentina's Industrias Metalúrgicas Pescarmona SAIC y F (Impsa) extended the subscription period for its offering of up to $250 million of class 1 notes due 2014 one day to Friday.

The notes are being offered under Impsa's $500 million global notes program.

Impsa is a Mendoza, Argentina-based wind and hydropower producer.

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