Asia remains focused on Sichuan quake; Argentina lower; Mexico continues to outperform index

By Paul A. Harris

St. Louis, May 14 - A trader who focuses on Asian fixed income said that the Asian credit markets opened better on Wednesday, in line with the other credit markets, and traded well for most of the day then faded somewhat toward the final hour or so as U.S. stock prices came off their intraday highs.

High beta Asian names remain tricky, the trader said.

Although the markets have recovered from the panic-induced lows of March and early April, liquidity is still poor. And new supply, which might serve to validate a better tone, remains scarce.

"Until you get more primary deals coming and pricing well, it's still somewhat elusive as to how solid the market's footing actually is," the source commented.

One inhibiting factor, with respect to new supply from Asia, is the hung-up LBO-related loan and bond debt that remains on the books of the big U.S. dealers.

Although that supply has been greatly reduced in recent weeks, from what was estimated as high as $230 billion last fall to a present amount that has been estimated as low as $150 billion, having that supply moving at major discounts to par has prompted investors to remain disinterested in Asian high beta corporates.

"It's difficult to get investors to care about Asian corporates at levels where those companies would be interested in issuing," the trader explained.

The China situation

At the moment, the trader said, participants in the Asian credit markets are focused on the magnitude 7.9 earthquake on May 12 in Sichuan, China, which shook office buildings in Beijing and Shanghai, and was felt as far away as Pakistan, Thailand and Vietnam.

"People are trying to gage what happened, and how much impact there has been on infrastructure, and how much disruption there will be to the mining and power generation," the trader said, adding the quake's destruction of the Zipingpu Hydropower Plant, located 15 miles east of the epicenter, has gotten peoples' attention.

Reports from China suggest that damage to small and medium-sized dams may be widespread, with more than 300 such structures having sustained some damage in the catastrophe.

As yet the quake damage has not really registered on publicly traded Chinese corporate bonds, the trader said, adding that the aftermath could possibly have an upside for some, such as property developers, should increased demand for new homes emerge.

However if projects underway by those developers have sustained major damage it would end up as a negative, the source added.

"The broader concerns are the impact of this disaster on inflation and GDP," the trader said.

"Right now it's still too early to tell."

Argentina loses on tax conflict

Enrique Alvarez, head of Latin American financial markets for IDEAglobal, was not seeing price changes in the Latin American sector space when he spoke to Prospect News mid-morning.

Alvarez said that the sector has basically been stuck in a two-tiered structure.

On one side there are the high beta stories, which for the most part are bearish, and tend to focus on Argentina and Venezuela.

"Today's loser is Argentina," Alvarez said, citing the Argentine government's ongoing conflict with that nation's agricultural sector.

Ostensibly Argentine farmers are due to decide Thursday whether to continue a lengthy strike which will soon register an impact grain exports, according to press reports.

At issue is the government's sliding scale export tax, particularly on soybeans.

"Yesterday there were some ideas floated that the farmers would be willing to become closer in some negotiations with the government," Alvarez said.

"That does not seemed to have happened. So we see some downside pressure, with a little bit of a discount on the Venezuela 2033s.

"The rest of the market is responding to the challenges ahead for the U.S. Treasury market," he added, noting that with the yield on the 10-year Treasury a lot closer to 4% than it has been for some time, it has set in train some undesired price changes in Latin American debt.

Mexico continues to outperform

Alvarez also said that Mexican sovereign debt remains among the outperformers in the Latin American sector as well as in all of emerging markets credit.

Thus far Mexican debt appears unfazed by increasing violence in the attacks and counterattacks that have taken place as the Mexican government attempts to reassert control in areas where violent drug cartels operate.

Edgar Millan Gomez, Mexico's highest-ranking law enforcement officer, was shot dead in his own home in Mexico City on May 8. Gomez had been responsible for overseeing most of Mexico's counter narcotics efforts, including the January arrest of one of the leaders of the Sinaloa cartel.

A week earlier Roberto Velasco Bravo, an administrator with the Federal Police, was assassinated by two gunmen near his home in Mexico City.

Alvarez said that the situation between the government and the cartels remains on peoples' radar screens because it influences Washington's policies toward Mexico.

"The market would become concerned if the violence extended to political figures instead of police figures," he said.

However, he added, as of Wednesday the Mexican sovereign has generated a year-to-date return of 4.6% in the Latin American EMBI-Plus, rendering it a significant outperformer relative to the broad Latin American index which has returned 1.94% year to date.

Mexico's year-to-date performance relative to the EMBI Global index, which is only up 1.6% on the year, makes the performance of the Mexican sovereign is even more noteworthy," Alvarez added.

Energy reform and the U.S. economy

The IDEAglobal strategist said that Mexico for the most part is concentrated on two issues: the energy reform agenda tracking through the Mexican congress, lately facing hurdles from the opposition, and the pass-through effects of U.S. economic weakness into the Mexican economy.

"For the most part U.S. economic weakness seems to have been held at bay until now, but it's still a prime consideration going forward," he commented.

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