Emerging markets trim gains; Philippines, VTB possible new issues; volume at slow summer pace

By Aaron Hochman-Zimmerman

New York, June 19 - Emerging markets widened on Friday, but the moves came on what were at times painfully slow trading volumes.

Lithuania's new bonds remained positive as other issues, including the recently rallying Argentina bonds, resumed the week's slow-bleeding sell-off.

On the primary side, a new samurai bond may be in the future for the Philippines as well as a possible new issue from Russia's VTB; however, nothing seemed imminent on Friday.

Meanwhile, from the major markets, equities were mixed again, but volatility burrowed through the 30.00 level by shedding 2.04 to close the day at 27.99, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets widened by 5 basis points to a spread of 440 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Emerging Europe 'really dead'

Emerging Europe dragged through another "very slow day," a trader said, describing the market as "really dead."

It could be "the quietest day in months," he said, as the market was just "waiting for new issues."

About Russia's VTB, "we hear something," he said, but no firm details were available.

Meanwhile, Monday's new 9 3/8% bonds from Lithuania remained positive but lost ½ point to 101 bid, 101¾ offered.

In Russia, the government bonds due 2030 were spotted at 98.35 bid, 98½ offered, while Ukraine's bonds due 2016 were quoted at 67½ bid, 68 offered.

IMF optimistic on Turkey

In Turkey, the first deputy managing director of the International Monetary Fund, John Lipsky, spoke of positive signs for the world economy before the Turkish Industrialists' and Businessmen's Association.

"After two quarters of an unprecedented global economic contraction that carried through this year's first quarter, signs are emerging that the rate of output decline has moderated," he said.

Lipsky touted coordinated recovery efforts for arresting the crisis.

"The improving prospects for the global economy owe much to resolute policy actions across a broad range of countries," he said.

Specifically for his audience, "The Central Bank of Turkey's inflation targeting framework and the floating exchange rate regime have worked well to absorb external shocks," he said.

Ankara recently made it clear that is it ready to move forward without a new standby agreement from the IMF, but Lipsky said the IMF will return if it becomes necessary.

"My IMF colleagues and I share great optimism regarding Turkey's future, and we stand ready to help support Turkey in any way that we can," he said.

The Turkish sovereigns due 2030 were seen at 152 bid, 152½ offered.

Slow LatAm drifts wider

Latin America traded slowly as well.

"People are starting to tone it down a bit," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"A lot people are pretty anxious to get out the door," he said, with the Independence Day break approaching in the United States.

"There's drift," he said, which was "mostly negative," although the market "has not broken through critical support levels ... We're pretty much range-bound."

At the trading desks, "the enthusiasm has come off of Argentina in the last few days," he said.

Local businesses fear greater government intervention or even nationalizations, he said.

The 8.28% Argentine discount bonds due 2033 were unchanged at 45 bid, 46¼ offered.

Elsewhere, "Peru has underperformed," Alvarez said.

Prime minister Yehude Simon is expected to step down after disputes over land with indigenous tribes, reports said.

The typically stable bonds suffered while the government is "on shaky footing," he said.

The 6.55% Peruvian bonds due 2037 dropped 1 point to 93 bid, 94¼ offered.

In Venezuela, the oil story continued as crude traded as low as $69 per barrel.

The 9¼% Venezuelan government bonds due 2027 were better by ¼ point to 69 1/8 bid, 70 3/8 offered.

Also in Brazil, the 7 1/8% sovereigns due 2019 were spotted at 104½ bid, 105 5/8 offered.

LatAm may be tested

Levels were slightly weaker on Friday, but in the coming week, "we may see new lows in Latin America," Alvarez said.

At next week's meeting of the Federal Reserve, there is the potential for more purchasing of Treasuries, he said, but that is unlikely.

Depending on the actions and memos released by the bank, Treasury yields may climb back past 4% and severely strain Latin America, he said.

"We're way too far ahead in all asset classes in Latin America," he said, adding that equities are the most overbought, but credit levels are elevated as well.

Philippines may try samurai

In Asia, reports confirmed earlier rumors that the Philippines received backing from the state-supported Japan Bank of International Cooperation for an upcoming samurai bond.

Some reports indicated that Manila may try $1 billion or more.

In Pakistan, the military's push against the Taliban in the Swat Valley is nearly complete.

Still, after two months of hostilities, much of the Taliban leadership remains in place, the BBC reported.

The military will shortly turn its attention to militant activity in the South Waziristan region.

Meanwhile, China sharply criticized the Asian Development Bank for extending a $2.9 billion loan to India.

The point of contention was a $60 million tranche of the loan, which is intended for flood relief in the disputed state of Arunachal Pradesh, which is also claimed by Beijing.

The Manila-based ADB said that the loan did not represent an endorsement of the Indian position.

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