Emerging markets still flat; investors wait for Fed; Philippines prices $500 million add on

By Aaron Hochman-Zimmerman

New York, Jan. 29 - Investors in emerging markets held firmly to their chips in anticipation of a rate cut Wednesday from the Federal Open Market Committee.

"The general consensus is 50 [basis points]," a portfolio manager said.

"It seems to me that 25 [bps] would do it," he said, but added that anything less than what is expected may be cause for disappointment.

The anticipation led to a slow day of trading across all of the emerging market sectors.

However, the primary market was able to draw attention as the Philippines priced a $500 million reopening of its bonds due 2032.

"There's a lot to wait for," a syndicate official said, referring to the Fed announcement on Wednesday and the release of the nonfarm payroll data on Friday.

"The Fed needs to show it's ahead of the curve," an emerging markets strategist said.

Even if the U.S. stimulus package and rate cut prove successful, "the external markets are still going to be fragile.

"The Fed can cut and cut but it doesn't necessarily affect the issue," he said, which is mostly bank lending.

The United States has a bank credit to GDP ratio of 225%, he said, "We are an extremely credit-dependent economy."

And "it's the external markets that are driving EM at the moment," he said.

"Citibank bonds are 8% for a five-year bond; why pay another 300 bps for Brazil?" he asked.

"Core market high yield is becoming so attractive."

Without a major market recovery in the near future, "I don't see any course other than for EM spreads to be wider," he said about emerging market's long-term prospects.

In the near term, "we're trading in the right direction," a syndicate official said.

Good news did come early on in Tuesday's session, as stocks took a lead from encouraging news out of the U.S. Commerce Department.

New orders of durable goods manufactured in the United States during December were up $11.2 billion or 5.2%, according to the Commerce Department's website, outpacing expectations.

Meanwhile, the International Monetary Fund forecast that major markets as well as emerging markets will see slower economic growth in 2008.

Growth in the developed world is expected to slow to 4.1% from 4.8% this year; emerging economies should see 6.9% growth compared to 7.8% during 2007.

China's economy, which expanded at 11.4% in 2007, is expected to grow at 10% in 2008.

Africa is the only region that is expected to advance. The IMF expects 7% growth in 2008, up from 6% in 2007.

In trading Tuesday, volatility spiked early but fell off by the end of the session. The VIX index closed lower by 0.46 at 27.32. The index is a frequently used measure of market volatility.

Treasuries stepped back, but left emerging markets unchanged for the second day in a row. As a sector emerging markets carried a spread of 267 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors expect in order to keep assets in emerging markets debt.

Light trading in emerging Europe

Trading in emerging Europe was marginally better on shallow volumes, despite the heartening news from the U.S. Commerce Department.

Equities' performance was encouraging, but investors were still reluctant to make big moves the day before an announcement from the FOMC, a syndicate official said.

In Turkey, the capital markets board is working to establish new instruments which would encourage foreign investment in the country, the Turkish Daily News reported.

The board will especially encourage investment in the real estate sector, the report said.

The Turkish government bonds due 2030 added 0.375 to trade at approximately 156.625 bid.

In Russia¸ the Kaluga Region has agreed to allow an automobile factory to be built by France's Peugeot-Citroen Co.

The factory will bring an investment of €300 million and an additional 2,600 jobs when it is completed in 2010, according to the Itar-Tass News Agency.

The Russian sovereigns due 2030 were off 0.125 to trade at 115.125 bid.

Poland's foreign minister Radoslaw Sikorski met with Ukraine's president Viktor Yuschenko on Tuesday to discuss energy policy and border crossing issues.

The Ukrainian bonds due 2016 were spotted at 100.375 bid, 101.375 offered.

Philippines prices $500 million

The long-awaited $500 million sovereign from the Philippines priced Tuesday, "hopefully" opening the door to further new issuance, a syndicate desk official said.

But, he added: "I've always thought the sovereign world is in its own little bubble."

The Republic of the Philippines (B1/BB-BB) priced a $500 million retap of its 6 3/8% bonds due 2032.

The bonds priced at 98 to yield 6.54% with a spread of Treasuries plus 220.5 bps.

The total amount of the issue is now $1.5 billion.

Credit Suisse and Deutsche Bank were the bookrunners for the registered deal.

Proceeds will be used for general budgetary purposes.

"It was a pretty wide spread," a source close to the deal said about the interest in the deal.

Approximately 44% of the demand came from Asia, 29% from the United States and 27% from Europe, he said.

"It was very oversubscribed," he said, noting that it drew about $4.6 billion worth of interest.

In trading, the price gained its original level of 97.75 to 97.875 and finally to 98, he said.

The Philippine bonds due 2032 were quoted higher by 0.25 to 0.5, later in the session.

LatAm flat, looks to Fed

Latin American debt was in no mood for change on Tuesday as prices hardly moved.

Despite positive data on Tuesday, the softening of major markets have made investment there more attractive than even the more conservative emerging market bonds, such as Brazil, a strategist said.

Brazil's issues were also caught in the calm of uncertainty before a rate cut intended to stave off a major market recession.

The Brazilian 11% sovereigns due 2040 were almost flat, gaining just 0.05 to trade at 134.15 bid. The 7.125% bonds were flat at 109 bid, 109.4 offered.

Even high-beta Argentina remained flat in the light trading before the Fed meeting.

The 8.28% Argentine bonds due 2033 were seen unchanged at 92.5 bid, 93.25 offered.

Meanwhile, a lawyer from Venezuela entered a guilty plea in Miami for his alleged part in a supposed effort to cover up what has been called the illegal transfer of $800,000 from president Hugo Chavez to then first lady and presidential candidate Cristina Kirchner of Argentina.

Both governments have denied any wrongdoing.

The 9.25% Venezuelan bonds due 2027 added 0.2 to trade at 101.2 bid, 101.75 offered.

Quiet Asia mostly unchanged

Asian credits showed little movement as most investors were locked into their positions ahead of the Fed announcement, a portfolio manager estimated.

Inflation in the Philippines is forecast at 3.7% to 4.4%, the central bank announced, according to the Manila Times.

The rise was blamed on the higher prices of commodities such as rice and flour.

The peso was seen trading at 40.35 to the dollar.

The Philippine bonds due 2030 held flat at 132.25 bid, 133.5 offered.

In Indonesia, industrial real estate prices in and around Jakarta will likely hold flat in 2008 due to easing demand, the Jakarta Post reported.

The price currently stands near $62 per square meter.

The Indonesian government bonds due 2018 were seen higher by 0.625 at 103.125 bid, 104.125 offered.

© 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.