Emerging markets widen on U.S. flight to safety; prices mixed; primary market still sleeping

By Aaron Hochman-Zimmerman

New York, July 28 - Emerging market credits were pulled wider by a flight to safety in the U.S. market, but few of the day's drivers came from the emerging sector itself.

News of violence in India as well as attacks and an impeding court decision in Turkey had little effect on a market that froze in the headlights while the Dow Jones Industrial Average dumped 239 points.

Meanwhile, the primary was nearly silent as investors saw only Hong Kong & China Gas Co. Ltd. on the road with its dollar-denominated deal through HSBC and Morgan Stanley.

Elsewhere, emerging market bonds funds saw outflows of $82 million during the week ended last Wednesday, according to EPFR Global. The sector has seen losses for seven consecutive weeks.

In the broader market, equities spent the day sinking while volatility did the opposite. The VIX index ended higher by 1.32 at 24.23. The index is a common measure of market volatility.

On the U.S. side, Treasuries were advancing as emerging markets widened by 9 basis points to a spread of 285 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 7 bps with a spread of 315 bps. The diversified index has a less strict liquidity rule for inclusion.

Asia sinks into afternoon

In Asian credit, the market was "quiet in the morning, then a good deal weaker in the afternoon," a trader said.

"The driver today was U.S. equities," he said. "It wasn't a really news-driven day."

In the Philippines, the finance department expressed its preference of retaining the 12% value added tax on oil rather than replace it with an excise tax.

The new plan is gaining steam in the lower house of the legislature.

"The problem with specific tax is that it gets eroded when price increases," said Teresa Habitan, director for fiscal planning, according to the Manila Times.

However, representative Exequiel Javier argued that taxes should be paid based on the amount consumed rather than the market value of oil.

The original plan for the value added tax was to raise PHP 18.6 billion in revenues, the report said.

The Philippine government bonds due 2030 were quoted at 126.125 bid, 126.625 offered.

In Indonesia, oil production was lower than the rate of oil imports for the first half of 2008, and many expect the trend to continue through the remainder of the year, economist Faisal Basri of the University of Indonesia said, according to the Jakarta Post.

"We are heading toward a very critical situation if we don't formulate a proper energy policy. The deficit is predicted to be $15 billion at the end of this year," Faisal said in the report.

Aside from rapidly increasing demand, he criticized the state oil and gas firm Pertamina for inefficiencies and encouraged the country to find alternative energy sources.

Indonesia's credits have been trading cheap to other similarly rated (BB-) credits in the sector, a market source said, adding that the discount provides a strong buying opportunity.

The Indonesian sovereign bonds due 2017 were spotted at 98.5 bid, 99 offered.

New aggression from old rivals

In India, a soldier was killed by a small unit of Pakistan's military after it crossed the Line of Control between the two sides of the disputed region of Kashmir, an Indian army official said, according to reports.

The shots exchanged between the two sides were the first since a ceasefire was declared in 2003.

Meanwhile over the weekend, 17 bombs in Ahmedabad, India, killed 49 persons, reports said.

An obscure Muslim extremist group called the Indian Mujahideen claimed responsibility for the attacks.

Pakistan's government bonds were mostly unaffected by the news.

Hong Kong & China Gas taps dealers

The major action in the primary was provided by the Hong Kong & China Gas Co. Ltd. (A1/A+/), which has mandated HSBC and Morgan Stanley to manage a roadshow for its dollar-denominated bonds.

The roadshow began in Singapore and Hong Kong on Friday. Presentations will also be held in London on Tuesday and in the United States until Wednesday.

The proceeds will be used to refinance debt or for general corporate purposes.

Hong Kong & China Gas is a Hong Kong-based gas and utility company.

Emerging Europe opens week mixed

Emerging Europe traded on thin volumes to open the week on Monday.

During the European session, credits were mixed but were spared most of the afternoon sell-off in the United States.

In Russia, the central bank cut its holdings of U.S. mortgage bonds to $50 billion from $100 billion this year, said the bank's first deputy chairman, Alexei Ulyukayev, according to the RIA Novosti News Agency.

Bonds issued by the Federal Home Loan Bank, Fannie Mae and Freddie Mac made up 37% of the central bank's foreign securities holdings.

Also, Russia has agreed to jointly produce rocket propelled grenade (RPG) launchers with Jordan, RIA Novosti reported.

The RPG-32, expected to be fielded by 2010, will have a greater kill probability than similar types already in use, said deputy chief designer Nikolai Sereda of the defense company Bazalt.

The Russian government bonds due 2030 added 0.35 point to 111.95 bid, 112.15 offered.

Also in emerging Europe, Ukraine's president Viktor Yushchenko said he expects his, at times lukewarm, ally prime minister Yulia Timoshenko to run for the presidency.

"Yes, I'm sure she will," Yushchenko said at a press conference, according to the Itar-Tass News Agency.

Still, Timoshenko denies she will run in the next election in 2010.

Turkish court meets on AKP ban

In Turkey, while the constitutional court met to determine the fate of the ruling AK Party, 17 persons were killed by two bombs in Istanbul, reports said.

The panel of 11 judges will continue to meet daily until it has reached a decision.

If the AK Party is disbanded, prime minister Recep Tayyip Erdogan and president Abdullah Gul may be forced out of politics for up to five years.

A finding against the AKP would also mark the first time that a party holding the majority in parliament was shut down.

The Turkish sovereigns due 2030 were quoted at 146.1 bid, 146.75 offered.

LatAm slips on slow Monday

Latin America traded through a slow summer Monday, a strategist said.

In the afternoon, following U.S. equities "the mood turned kind of sour," he said, and "that weighed on sentiment everywhere."

Venezuela was strong in the morning on a recovery and "mostly dealer driven rally," he said.

Still the benchmark 9¼% sovereign bonds due 2027 closed lower at 91.65 bid, 92.5 offered.

In Argentina, after losing the battle to raise tariffs on farm goods, the government is now likely to take a more conciliatory stance against the opposition, a market source said.

However, its new peacemaking is not likely to have a major effect on the country's credit, the source said.

The 8.28% Argentine discount bonds due 2033 were spotted at 76 bid, 77 offered.

Also in Latin America, Brazil's 7 1/8% government bonds due 2037 tacked on 0.25 point to 110.75 bid, 110.95 offered.

And now the weather ...

The recent La Nina season, which began in the second quarter of 2007, may show a negative impact on agriculture in Peru and Ecuador, but produce a boon for agriculture and fishing in Indonesia and the Philippines, said an emerging markets strategist in a recent research report.

If the global changes in weather patterns, although usually more mild than El Nino events, serve to create a cold and wet winter in the Northeast corner of the United States, oil prices may see a spike, he said.

The greater frequency of hurricanes in the Gulf of Mexico since the 1990s has also put pressure on oil prices.

This year, experts predict at least 10 major storms or hurricanes in the gulf this season, the strategist said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.