Roller-coaster week ends with 'feeding frenzy' for EM assets; EM bond funds see outflows

By Christine Van Dusen

Atlanta, Oct. 7 - Emerging markets assets finished off a topsy-turvy week on a stronger note on Friday amid continued - though somewhat guarded - optimism about the European financial crisis and the U.S. economic picture.

"It's the kind of week that can make or break your year," a trader said. "In four days we go from questioning the validity of the global banking system to a feeding frenzy for risk as U.S. data shows their economy is still rolling along."

Another trader called it "amazing stuff," noting that names like OJSC Gazprom were as much as 100 basis points tighter on Friday than they were on Tuesday.

On Friday, the Markit iTraxx SovX spread tightened 10 bps but corporates fared even better.

"Emerging Europe, Middle East and Asia continue to regroup with liquidity and demand returning to a whole host of names that had been in hiding for the last week," a trader said.

Standouts included Serbia and Alfa Bank.

"The tone was fairly supportive all day, with volumes restricted primarily to benchmark assets," a trader said. "It was a sluggish morning, but there's been a bit more action, after the economic data. [There was] a good bounce-back in risk appetite and further stability."

But sources from Barclays Capital urged caution.

"Cleaner risk positions and accumulated cash are a near-term support for this week's rally, but it is premature to jump to constructive conclusions regarding the ability of European authorities to contain the sovereign banking crisis," Barclays said in a report. "Given the prospect of ongoing volatility and dismal liquidity, but very tempting spread levels, we recommend a risk-neutral allocation to corporates. We like a combination of low-volatility short-dated positions and dislocated BB/B credit."

Monday is expected to be quiet, given the Columbus Day holiday in the United States.

"Liquidity will be even worse than it is on a good day," a trader said.

Turkey tightens

Friday also saw Turkey's cash bonds open 6 bps to 7 bps tighter while Isbank continued to feel a squeeze and retail investors nibbled on other banks, a trader said.

"We traded Yasar Insaat with retail investors continuing to add more at these levels in small amounts," he said.

Lebanon's 2013s saw small selling while small buying was reported for the sovereign's 2022s.

"Lebanon went out a little softer today," a trader said. "For international players the spreads have done a lot this week. And also for local players, we've reached some levels where in the past it has struggled to get through."

The 2022s were named "bond of the week" by one trader, after the notes traded as high as 101.50. Sharjah Islamic Bank was another star performer and saw a 105.375 bid.

"Impressive efforts this week," he said.

Ukraine lags

Ukraine underperformed on Friday morning.

"It's barely tighter on the day, aside from the squeezed 2021s, as devaluation rumors still do the rounds," a trader said.

Naftogaz got hit particularly hard. "However, at these levels it's looking to have value," he said.

Russia banks remained highly illiquid.

"Clearly the world is not out of the woods as far as Europe, Greece, banks, you name it," a trader said. "At least through October and November things are going to stay choppy."

Dubai, DEWA active

A lot of Dubai and Dubai Water and Electricity Authority bonds were seen trading during the European afternoon on Friday. DEWA's 2020 bonds were seen at 93.62 bid, 94 offered while the sovereign's 2020s were seen at 97 bid, 97.5 offered.

"Both are 20 bps wider, week on week," he said.

Said another trader: "For the last 48 hours client flow has been relentless buying, aside from the odd illiquid bond."

He pointed to City of Kiev and Cairo-based African Export-Import Bank.

"There remain trapped longs," he said of those names.

South Africa a champ

South Africa, however, remained a top performer, a trader said.

"South Africa still trades like a champion, immune to volatility," he said. "It's amazing to think they could still borrow 10-year dollar notes at 4½%."

But some names remained under stress on Friday, a trader said, including Kuwait's Kipco and Dar Al-Arkan International Sukuk Co. II.

"They will probably remain that way," he said.

Kuveyt Turk roadshow detailed

Turkey-based financial institution Kuveyt Turk Katilim Bankasi AS announced the details of its planned roadshow for a possible dollar-denominated issue of sukuk notes, a market source said.

The marketing trip for the Regulation S deal begins Oct. 10 in Singapore and travels to Dubai, Abu Dhabi and London before concluding Oct. 18 in Geneva and Zurich.

HSBC, Liquidity Management House and Standard Chartered Bank are the bookrunners.

"We're going to see the new issue machine being turned back on," a trader said. "It's amazing to even mention that, I know, given the tone on Tuesday. But such have been some of the moves."

Said another trader, "Issuers everywhere must be breathing a collective sigh of relief."

Gazprom postpones

Russia's Gazprom has decided to delay its planned offering of dollar-denominated notes until close to the end of the year, a market source said.

The Moscow-based gas company had embarked on a roadshow in late September with bookrunner UBS for a possible Regulation S offering.

"UBS and Gazprom wish to extend their gratitude to all of the investors they have met during the meetings in Switzerland ... and to those who have expressed an interest in an issuance," UBS announced. "Given the current market conditions, the company will continue to monitor market conditions."

EM bond funds see outflows

In other news, emerging markets bond funds saw outflows of $1.44 billion for the week ended Oct. 5, according to a report from data tracker EPFR Global.

This extended the funds' longest outflow streak in more than seven months.

"Fears that the euro zone debt crisis will spread via bank balance sheets to the rest of Europe and the U.S., thereby blighting already slim hopes of sustaining economic growth, kept markets and the funds that invest in them under pressure during early fourth-quarter 2011," EPFR said.

Among the emerging markets bond fund sub-groups, Hong Kong, Mexico and China funds managed to eke out inflows, the report said.

"Flows from emerging Europe bond funds continued the plunge that started in early July," EPFR wrote.

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