Emerging markets weaker on headlines, oil prices; trading light; primary keeps supply low

By Aaron Hochman-Zimmerman

New York, Oct. 16 - Emerging markets had another day of slightly softer trading and little flow from the primary pipeline.

Trading was unenthusiastic as some were concerned about profit taking and others reacted to negative headlines courtesy of U.S. economic big shots Federal Reserve Bank chairman Ben Bernanke and Treasury secretary Henry Paulson.

"The external environment got much more complicated," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, who also referred to disappointing profit numbers from investment banks and persistent U.S. mortgage problems.

Despite the rest of the market dragging its feet, the perennially impulsive Argentina took top honors in trading by tacking another 0.45 on to its high-beta sovereigns.

If market watchers expected the day's action to come from the primary, they were disappointed. Brazil's Gerdau SA provided the only news by setting the size of its issue at $1 billion.

The light trading was accompanied by volatility which was on the rise again and passed across the psychologically significant 20.00 mark. The VIX index, which is the accepted yardstick of market volatility, gained 0.77 to close the day at 20.02.

In the statistics, emerging markets as a whole demonstrated its general disinterest in the fluctuating sentiment offered by investors. JP Morgan's EMBI+ index was seen only wider by 1 basis point at 183 bps. The index measures the amount of extra yield that investors demand to hold emerging markets debt.

Another small step back for Europe

European trading took a slight step back and chips came off the table as the market began to shift in sentiment.

Negative comments from Bernanke and Paulson were not encouraging, Alvarez said.

"Plus $88 oil has not really tied in positively," he said.

Many see the rising price of oil strongly correlated to rising tensions in the Middle East and specifically Turkey's political maneuvering.

In Turkey, tensions are still boiling over the possibility of a Turkish invasion of Iraq. Iraqi prime minister Nouri al-Maliki called a meeting of his cabinet to discuss the repercussions of an invasion and to call for talks between the two nations.

Turkish prime minister Tayyip Erdogan tempered his earlier comments by stating that he hopes military action does not become necessary, and would not be a certainty even if parliament passes a resolution clearing the road for the Turkish army to strike Kurdish targets inside Iraq.

However, Erdogan did warn the Iraqi national government and local government of Iraqi Kurdistan to distance themselves from the Kurdistan Workers Party (PKK), which is considered a terrorist organization by Turkey and the United States.

Turkish government bonds due 2030 were seen trading flat at 156.50 bid, 156. 875 offered.

Despite all the talk, "Turkey seemed to be somewhat stable," Alvarez said.

"There's no direct impact," he said about Turkey's effect on the larger emerging markets.

High prices a silver lining for LatAm oil producers

Latin America proved again it is not overly tied to the troubles in the United States, as issues performed similarly to Monday.

As much of the world dreads the prospect of higher oil prices, the oil-producing countries are ready to cash in.

Venezuela showed its "resilience," Alvarez said as the 9.25% Venezuelan sovereign due 2027 took on a gain of 0.25 to trade around 108.00 bid, 108.75 offered.

In Argentina president Nestor Kirchner made local headlines as he continued to press banks to encourage and allow for easier loan rates.

Local banks are expected to unveil a new plan Wednesday to offer retail loans to individuals at 9% and to corporations at 12%, according to a market source.

Exactly how the plan will be implemented is still unknown, the source said.

The move is intended to increase liquidity, but impulse consumption may fan the flames of inflation, the source added.

The peso was spotted trading at 44.222 to the dollar.

Argentina's 8.28% sovereigns due 2033 were quoted up 0.45 near 94.20 bid, 94.95 offered.

Brazil's central bank cut its 2007 inflation estimate to 3.91% from 4.01%. The estimate for 2008 still remains at 4.1%.

The economy created 251,000 jobs last month, a market source said, compared to only 177,000 in September of 2006.

The highly watched Brazilian 11% sovereign due 2040 was more representative of the rest of the market as it lost 0.05 and was seen trading around 133.60 bid, 133.65 offered.

The real was seen at 3.703 to the dollar.

Asia weaker on profit taking fears

Asia lost some ground Tuesday, but profit taking was not quite so much the problem as it was the fear or anticipation of profit taking, a trader said.

"Equity had a good run, credits had a good run," the trader said indicating that a small correction may have been in order.

As the market sector was softer, Indonesia's benchmark sovereigns slid approximately 0.25. The government bonds due 2017 traded at 105 bid, 105.875 offered.

During a patch of light supply, Sri Lanka wrapped up a roadshow Tuesday for its upcoming sovereign.

Meanwhile in southern Sri Lanka six soldiers were killed and two went missing after an attack by the rebel group known as the Tamil Tigers, according to the BBC.

Violence has intensified in the island nation, mostly in the north where the separatist Tigers hold a small section of land.

In corporates, Korea's MagnaChip Semiconductor LLC is still riding the highs it got from Monday's release of third quarter numbers which were 3% better than projected guidance.

Furthermore, fourth quarter numbers are now expected to be another 20% higher than the third quarter.

The company's 8% notes due 2014 jumped up another 2.5 to 75 bid, 77 offered, according to a trader.

The trader also saw the 6.875% notes due 2011 up 1.5 at 87.5 bid, 98.5 offered. The floating-rate notes due in 2011 were quoted up 2.5 at 91.5 bid, 93.5 offered.

Only a trickle from pipeline

The primary market is showing signs of backlog, but many investors are not surprised to see a slowdown after the recent rush of new issues.

Brazil's Gerdau SA set the price of its new benchmark offer at $1 billion.

ABN Amro, HSBC and JP Morgan will take the books for the 10-year bullet (Ba2/BBB-/BBB).

Gerdau is a Porto Alegre, Brazil-based steel manufacturer.

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