Anxiety persists over Europe economy, Spain downgrade; primary silent; MTS, Sabic eyed

By Christine Van Dusen

Atlanta, May 28 - Though emerging markets investors have slowly begun to open their minds to risk, Friday was no banner day. That's because the hits kept coming, this time with Spain's downgrade, which amped up the anxiety and kept the primary paralyzed, leaving investors to limp into the weekend in a state of bad-news fatigue.

Yields fell Friday as concern about the European economic crisis were sparked yet again after Spain's credit rating was cut to AA+ from AAA by Fitch Ratings due to the sovereign's heavy debt burden and limited growth opportunities, sources said. This led market-watchers to wonder whether the contagion effect has not been contained after all and could further impact emerging markets.

The full effect of the Spain downgrade hasn't been felt yet, an emerging market debt portfolio manager said. "But it certainly cannot be positive."

Also in the mix on Friday was a U.S. Commerce Department report that showed consumer spending was flat, and weaker than expected, in April.

"Today was pretty quiet, with the upcoming holiday weekend," the portfolio manager said. "I think everyone was just tired, tired of everything that happened this month. And it seems like the negative news seems to be continuing."

Dull day overall

Overall, Friday was "pretty dull, to be honest," a London-based market source said. "The market is holding in OK, but I think a lot of shorts have thrown in the towel ahead of the month-end, week-end and the long weekend."

The Markit iTraxx SovX index last traded at "211, with low print at 209 and a high of 213," he said. "It's a tight range today. Flows are very light overall."

Generally, "risk seems to be back in vogue and clients want bonds again," a trader said. "But I cannot see that lasting."

The problem, he and other market sources said, is that any stability felt in the last month or so has been so short-lived that it's kept the window for new issuance and strong trading nearly shut. So any confidence felt Friday will likely be fleeting at this point.

Said the portfolio manager, "It seems like we have stability for a day or a few hours and then everything changes. It's been a tough month for everybody, and we're just trying to coast into the long weekend.

"I think a lot of people left early or didn't bother to come in. So I think for that we're probably going to see what happens next week. The first sort of reaction will be to widen the bid-offer."

No activity in primary

The primary was "dead-quiet across the board," the trader said. "There was no action in the primary at all today."

Some sources expect momentum could pick up in the May 31 week. "If positive mood continues next week, it could be a busy week for issuance," a market source said.

The deal flow could include Russia-based Mobile Telesystems' planned 10-year eurobond issue via Bank of America Merrill Lynch, Credit Suisse and RBS, which has been whispered at 8%. Also a possibility is Saudi Arabia-based Sabic Capital and its planned offering of five-year senior unsecured notes with JPMorgan, HSBC and RBS, which has been talked at mid-swaps plus 175 basis points.

The market source pointed to Malaysia's recent issue - a $1.25 billion sukuk due 2015 that priced at par to yield 3.928%, or Treasuries plus 180 bps - as a sign that deals can indeed get done.

But other sources expect the dry spell will continue.

"I think it's going to be more of the same," the portfolio manager said. "Issuers are taking it on a day by day basis to see if today's the day they can actually print something. But from the investor side, I'm not sure there's a lot of receptivity at this point."

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