Emerging markets add to momentum; Argentina makes up lost ground; primary loses pricing streak

By Aaron Hochman-Zimmerman

New York, April 4 - Emerging markets were stronger on Thursday even as equities finished flat.

"It's better and better everyday," a buyside source said.

Although, in the long-term "I'm still in the pessimistic camp," the buysider said.

"You could see some more short covering" for about another week, the buysider said, but "the rally is not based on outright buying, it's just short covering," the source said.

However, "this is the first time in a long while that you've seen consecutive firm days back to back," a trader said, "and that's not to be ignored."

Still, "there're still a whole lot of concerns out there about the health of the U.S. consumer," he said, as well as the health of the major investment banks.

Thursday's session continued a very strong trend in the market, a strategist said.

"We saw the tightening of spreads across the board" as investors went beyond covering shorts to adding risk, he said.

"It's not only [OAO] Gazprom, it's the whole market scenario," he said when asked if the pricing of $1.5 billion by the Russian gas giant was a watershed event for emerging markets.

"It's encouraging that they were able to place the deal," a buyside source said.

Still, "the allocations were not that great," but "on the whole it was a positive," the buysider said.

In trading, Argentina came rebounding back as the striking farmers agreed to talks with the government.

The discount bonds due 2033 added on 1.65 points.

In the primary, the three-day streak of pricing dollar-denominated deals came to an end on Thursday. Even the local-currency issuers remained quiet.

Stocks bounced as volatility fell sharply midday but crawled back to end lower by just 0.22 at 23.21, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets tightened by 2 basis points to a spread of 288 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will require to keep assets in emerging markets debt.

Emerging Europe stronger

Emerging Europe traded better with an improved tone during Thursday's session.

The market saw some short covering but may have fallen short of genuine buying, a buysider said.

At the NATO summit in Bucharest Wednesday, former Soviet republics Ukraine and Georgia were denied membership action plans by the 26-seat council.

Greece succeeded in having Macedonia's entrance denied, but former Warsaw Pact members Albania and Croatia will be allowed to join.

The alliance members also approved the plan to allow the United States to build missile defense systems in Eastern Europe.

Russia has expressed its opposition to expanding NATO and to the missile defenses.

NATO has agreed to revisit the question of a path to membership for Ukraine and Georgia again at its meeting in December.

The Ukrainian sovereigns due 2016 were spotted at 99 bid, 99.75 offered.

Also in Russia, officials from Gazprom and Naftogaz Ukrainy were scheduled to meet to resume oil price negotiations on Thursday.

Elsewhere in corporates, after a few months of general widening Russian corporate spreads are still largely tighter than in other credits across emerging Europe, a market source said.

The Russian sovereign bonds due 2030 were quoted at 114.875 bid, 115 offered.

Also in emerging Europe, Russia intends to support the independence of Georgia's breakaway regions of Abkhazia and South Ossetia, the foreign ministry said, according to the RIA Novosti News Agency.

"The Russian president stressed that Russia is not unsympathetic to the aspirations and problems to the two republics' population, where many Russian nationals live," the ministry said in the report.

The Tbilisi government accuses the Kremlin of aiding separatism and interfering in its domestic affairs.

A $500 million bond through JPMorgan and UBS is expected from Georgia.

Meanwhile in South Africa, where energy has become a serious issue, consumption of electricity this February is estimated to have been 2.3% higher than February of 2007, said Statistics SA, according to the Times of South Africa.

However, production is estimated to have increased by 2.7% in February, compared to the same period of 2007.

"I heard the lights started going out again a couple days ago," a strategist said.

The South African bonds due 2017 were quoted at 117.5 bid, 118.5 offered.

Bank governor discusses global crisis

Turkey's central bank believes "the world is currently facing the most acute crisis since the wake of globalization," according to the bank's governor, Durmus Yilmaz.

"We have been witnessing a global financial turbulence since mid-2007. Its magnitude, measured by the volatility index, is larger than that of the turbulence in 2006," he said in his opening remarks at the conference on current issues in economic governance, according to a press release.

"The big losses of financial institutions and deep plunge in consumer confidence due to a sharp fall in house prices and declining personal income have increased the possibility of a recession in the U.S. economy, which may have already started as we speak. Deterioration in risk perceptions has increased the risk premia of developing countries, including Turkey ... I believe Turkey's risk premium would be even higher in the absence of improvements in macroeconomic conditions and institutional reforms implemented in recent years," he added.

Meanwhile, the European Court of First Instance in Luxembourg overturned a 2002 ruling that labeled the Kurdistan Workers' Party (PKK) a terrorist group, according to the BBC.

Turkey has conducted operations against the PKK inside its borders and in Northern Iraq in recent months.

The Turkish army claims to have killed 16 PKK fighters since Monday, according to the BBC.

The Turkish sovereign bonds due 2030 were spotted at 149.125 bid, 149.5 offered.

LatAm still rides rally

Latin America was able to tighten spreads on another day of stability and strong sentiment, a strategist said.

In Venezuela, prices were advancing as the government announced plans to enact a windfall profits tax on the energy companies that benefited the most from the rising cost of oil.

Legislator Angel Rodriguez said the tax will claim 50% of oil revenues on sales above $70 per barrel and an additional 60% of sales above $100 per barrel, according to the BBC.

Exxon Mobile Corp. is still trying to recoup the $12 billion it claims to have lost when PDVSA claimed its oil holdings under a nationalization program.

The tax is expected to win approval in the legislature this week.

Light sweet crude was seen trading at $104.20 per barrel.

The 9¼% government bonds due 2027 jumped 1.1 points to 95.35 bid, 95.65 offered.

Elsewhere, Brazil's highly traded 11% bonds due 2040 were better by 0.4 point to 134.5 bid, 134.7 offered.

Farmers suspend strike 30 days

Argentina's credits showed improvement as the farmers announced a 30-day cessation of their strike in order to negotiate with the government.

The strike, which lasted three weeks, saw blockaded roads and food shortages in response to increased export taxes on soya and other farm products.

President Cristina Kirchner has said that the revenue from the new taxes is necessary to control the country's high inflation rate. The peso was seen trading at 3.158 to the dollar.

In a speech, Kirchner accused some labor leaders of "coup-mongering" and held firm on the taxes, but offered some concessions, including dairy farming tax rebates and transportation subsidies, according to the Buenos Aires Herald.

As one of the world's largest exporters of soya, wheat and beef, an ongoing conflict will have a serious impact on the country's export revenues, a BBC analyst said.

Simply because there is a cessation does not mean the problems are over, a strategist who focuses on Latin American corporates said.

"I think we'll see more and more of that going forward," the strategist said, using the strike as an example of "the deep seeded problems in the government and in the economy."

"A lot of the corporates look very good, but it's hard to justify the corporates when there's so much more liquidity in the sovereign world ... It's really a sovereign story right now," the strategist said.

The attractive corporates are not in the minority, "most of them are really in very good shape and everybody knows it, the strategist said, adding about corporates: "In Argentina, you either already own it and aren't a seller at these levels or don't want anything to do with it."

The 8.28% Argentine discount bonds due 2033 launched up by 1.65 points to 85.4 bid, 85.9 offered.

Asia keeps rolling

Asian credits improved with the rally as "the indices traded meaningfully tighter for the third day in a row," a trader said.

"Indonesia was the underperformer" due to its inflation picture, the trader said, adding: "There appears to be some selling pressure in cash."

Also, in Indonesia, the government set an $11.8 billion expectation for textile exports in 2009, according to the Jakarta Post.

Textile sales are expected to hit $11 billion in 2008.

Textiles have become one of the government's priorities, said minister of industry Faahmi Idris, according to the report.

"Over the last 10 years, the industry has consistently added an average $5 billion surplus to our export earnings. It is a very important sector," Fahmi said.

The government also announced $30.6 million in subsidies for new machinery.

The rupiah was seen trading weaker at 9,194.51 to the dollar.

The Indonesian sovereign bonds due 2017 dumped 1 point to 103.5 bid, and the Indonesian CDS finished 15 bps to 20 bps wide of the Philippines', the trader said.

Meanwhile in the Philippines, the International Monetary Fund advised the government to raise revenue to fund the government's medium-term infrastructure program, according to the Manila Times.

The IMF recommended raising taxes by 14.8%, as a percentage of GDP.

GDP growth, which is estimated at 6.3% for 2008, is likely to be supported by remittances from overseas workers and exports to a lesser extent, the IMF said in the report.

The Philippine government bonds due 2030 improved by 0.375 point to 131.375 bid.

Also in Asia, Pakistan's sovereigns were spotted at 86.5 bid.

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