Emerging markets weaker; S&P saves equities; local deals move in primary

By Aaron Hochman-Zimmerman

New York, March 13 - Emerging markets slipped on a rocky day in the market punctuated with disheartening headlines and an equity turnaround courtesy of Standard & Poor's.

The rosy S&P report, which concluded that most of this year's writedowns had passed, was not enough to prevent prices in the emerging markets from ending below ground level.

The headlines were still not enough to move some investors' perception of the market in either direction. "It's the same, there's nothing new to say," a trader said about market conditions, which were as illiquid and volatile as they were on Wednesday.

"You can notice the uneasiness," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The low volumes investors suffered are expected to grind even lower before Tuesday's Federal Open Market Committee meeting.

"It's the fact that the authorities here are throwing the proverbial kitchen sink at the market right now," a trader said about lagging volumes.

"We're waiting to see if the measures have some impact," he said.

Another trader was unenthusiastic about a major recovery following the Fed meeting.

"It's the law of diminishing returns as far as Fed action," he said.

Each time they act it is for "less good and it lasts for a shorter amount of time," he said. "We need something fresh."

However, fresh local-currency paper hit the primary market as Russia's Sistema Joint Stock Financial Corp. priced a 6 billion ruble deal.

In trading, Turkey led the losers as its bonds due 2030 shed 1.5 points.

After an early surge, volatility calmed to close up by only 0.07 at 27.29, according to the VIX index. The index is a standard gauge of market volatility.

As a sector, emerging markets tightened by 1 basis point to a spread of 297 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to keep money in emerging markets debt.

Emerging Europe mixed

Trading in emerging Europe was "jumpy" on a torrent of mostly negative market data and headlines, which also included analysis from S&P that indicated that the end of writedowns for 2008 may be near.

"Maybe it's good news," a trader said.

The market saw lean volumes, which "may start to get worse," he said as the market looks ahead to Holy Week and an FOMC meeting.

In Russia, the state telecom holding company Svyazinvest approved the merger of land-based wire communications firm Central Telegraph and internet provider CenterTelecom.

"Svyazinvest is quite capable of conducting this restructuring correctly and systemically," information and communications service minister Leonid Reiman told the Itar-Tass News Agency.

The Russian sovereigns due 2030 were spotted up 0.375 point at 114.875 bid, 150 offered.

Elsewhere, the U.S. ambassador to Belarus was recalled to Washington, D.C. Wednesday night.

The long-strained relations between the two countries began to deteriorate further on March 7 when the United States imposed new sanctions on the country's oil and chemical products.

The West has often criticized the Belarusian record on human rights. The United States and many E.U. states also maintain travel bans against president Alexander Lukashenko and other government officials.

Meanwhile in Turkey, top economic ministers said: "Don't worry, everything is fine," according to the Turkish Daily News.

Unsure of the reason for the press conference, reporters gathered to hear deputy prime minister Nazim Ekren, finance minister Kemal Unakiitan and state minister Mehmet Simsek make assurances that the economy was on a healthy track.

The trio did unveil an E.U.-modeled calculation for GDP, which puts the percentage of budget expenditures to GDP at 23.5% for 2006, compared to 30.9% using the old method.

The new calculations are not fully compliant with E.U. standards but are expected to be updated fully by 2011.

The Turkish government bonds due 2030 dumped 1.5 points to 149.5 bid, 150 offered.

Serbia offers loans to Kosovar Serbs

Also in emerging Europe, Serbia announced it will offer a total of 80 million dinars to new Serb-run businesses in Kosovo, according to a government press release.

Loans ranging from 500,000 to 2.5 million dinars will be approved for entrepreneurs while 1.2 million dinars will be offered for craftsmen's shops, said minister of trade and services Predrag Bubalo.

Serbia does not recognize Kosovo as an independent nation but is divided over the issue of splitting its ties with the European Union, which largely does recognize Kosovo's sovereignty.

President Boris Tadic called for new elections to be held May 11 after dissolving the parliament, which is gridlocked over the matter.

The early return to the polls is a "way out of Serbia's deepening political crisis," said BBC analyst Helen Fawkes in Belgrade.

Russia, Ukraine strike gas deal

After a battle over unpaid bills almost affected gas supplies to Ukraine as well as Western Europe, negotiators from Russia and Ukraine agreed to keep the fuel flowing until the end of the year.

The new deal will cut out intermediary companies, which were denounced heavily in the Ukrainian parliament for providing little more than higher prices.

Ukraine prime minister Yulia Timoshenko promised that prices would not exceed $179.50 per 1,000 cubic meters, but Ukraine will pay $315 per 1,000 cubic meters for past due bills in January and February. For the rest of the year, Ukraine will pay $179.50 per 1,000 cubic meters.

The intermediary firms, which were cut out of the payment pipeline, were RosUkrEnergo and UkrGazEnergo.

The deal was signed by Gazprom chairman Alexei Miller and Naftogaz Ukrainy chairman Oleg Dubina.

"It's unequivocally good news, but it's meaningless, isn't it?" a trader said about its relative impact on the market.

LatAm drops on external jitters

Prices in Latin America slipped as the markets were hit early with sour headlines and a wave of external volatility.

"The underlying current has to do with hedge fund liquidity and Carlyle," IDEAglobal's Alvarez said.

S&P's sunny outlook on writedowns helped the market recover "to a certain degree," he said.

Although, "who really believes them to start with?" he asked, "People are grasping at straws and that was a straw thick enough to row on today."

Argentina's sliding-scale tax increase on soft commodities, particularly on soy and sunseed, is expected to add an additional $1.2 billion to its GDP, a market source said.

The new revenue should help stave off inflation by helping the government scale down its debt, the source said.

The move will likely have little impact on foreign exchange, but it may help reduce the inflow of dollars, the source added.

An agriculture group called the move an ill-considered plan to add to the treasury at the farmers' expense, according to the Buenos Aires Herald.

Analysts doubt the plan will significantly move farmers away from producing soybeans, the report said.

Also in Argentina, four of the country's major farming groups discussed a lockout in response to rising meat prices, a market source said.

The 8.28% Argentine discount bonds due 2033 fell 0.5 point to 87 bid, 87.6 offered.

"Brazil was hindered by the tax floated onto domestic market," Alvarez said about the IOF value-added tax on domestic fixed-income participation by foreigners.

The 11% Brazilian bonds due 2040 fell 0.65 point to 132.95 bid, 133 offered. The 7 1/8% bonds due 2037 fell 0.6 point to 106.75 bid, 107 offered.

Venezuela seemed to follow Brazil, Alvarez added.

The 9¼% government bonds due 2027 dropped 0.75 point to 96.5 bid, 97.2 offered.

Also in Latin America, Colombia's 8 1/8% bonds due 2024 were quoted unchanged at 115 bid, 115.5 offered.

Quiet Asia inches tighter

Asian trading remained quiet but managed to draw spreads in slightly, a trader said.

The afternoon's equity bounce "caused some pullback from the wides, but it's worryingly thin in terms of client activity and street volumes," he said.

The Asian high-yield index opened near 635 bps from a wide of 640 bps on Tuesday, but it closed 15 bps tighter at about 620 bps, the trader said.

Still, "we're hearing anecdotally of liquidity in other markets, but we're not really seeing that," he said.

In the Philippines, the monetary board of the central bank held its overnight borrowing rate at 5% and its overnight lending rate at 7%, according to the central bank's web site.

"Since the key risks to the outlook for the remainder of the year are linked to imported oil and non-oil commodity prices, the monetary board concluded that these risks cannot be effectively addressed by monetary policy," according to a central bank press release.

As the rates held firm, the inflation projection for 2009 remained at 3.5% as the peso was seen trading at 41.4 to the dollar.

The Philippine sovereigns due 2030 slipped just 0.125 point to 128.5 bid, 129 offered.

Elsewhere, Indonesia's Bank Mandiri reported an 80% leap in profits on Wednesday.

Profits grew to 4.35 trillion rupiah on "a growth in loans and a significant rise in fee-based income as well as a declining cost of funds," president director Agus Martowardojo said, according to the Jakarta Post.

The Indonesian government bonds due 2018 also fell 0.125 point to 105 bid, 105.5 offered.

Also in Asia, Pakistan's bonds due 2017 were spotted at 82 bid, 86 offered.

Locals light up primary

Sistema (/BB-) priced a 6 billion ruble five-year bond with a coupon of 9.45% for the first year.

VTB Bank and JSC Rosbank acted as bookrunners for the issue.

Proceeds will be used to refinance existing debt facilities and fund investment programs.

Sistema is a Moscow-based consumer services holding company.

"This demonstrates the continued support in the capital markets for our development strategy, as well as the financial solidity of the group," said the senior vice president and head of the finance and investment group, Alexey Buyanov, in a press release.

Allied Banking Corp. (Ba3) increased the size of its 7 1/8% tier II subordinated notes to PHP 4.5 billion from PHP 3 billion.

The issue closed on March 6 in line with talk between 6 7/8% and 7 3/8%.

ING was the bookrunner.

The bank was able to increase the issue size based on subscriptions, which reached 1.7 times the original offer.

Allied Bank is a Manila-based retail and commercial bank.

"Despite volatile markets and movements in the benchmark rates during the offer period, the issue enjoyed strong demand from both retail and institutional investors," said Allied Bank president Reynaldo Maclang in a press release.

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