Emerging markets weaker post-holiday; No resolution in Argentina; XXI Century prices $150 million

By Aaron Hochman-Zimmerman

New York, May 27 - Emerging markets continued to swat at the specter of inflation but slid lower as investors returned from vacation to an unenthusiastic market.

Argentina continued on its track downward, losing 0.9 from its discount bonds due 2033, as the government seemed incapable of predicting or handling the actions of the striking farmers, a market source said.

In the primary market, Ukraine's XXI Century Investments Public Ltd. priced a downsized $150 million deal as deal announcements came from issuers in the Middle East.

Inflation continued to plague financial planners, especially in the smaller markets, a buyside source said.

"Each region will react differently [to inflationary pressures]. You'll see more currency appreciation in Asia ... In Latin America, policy rate hikes have already begun ... and in Emerging Europe, a combination of hikes and FX appreciation," the buysider said.

"We'll definitely start to see some more hawkish comments from the central banks," a trader said.

"It's all oil," said a syndicate desk official.

Equities track oil, and credit tracks equities, the official said.

Equities were mixed on Tuesday, which bounced volatility figures early, but the VIX index calmed to end the day just 0.09 higher at 19.64. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets crept tighter by 4 basis points to a spread of 255 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt rather than Treasuries.

Asia up, Vietnam wider

Asia inched up on a slow day of trading where "the only real activity of note was in Vietnam, [where] people were getting more worried about the inflation scenario there," a trader said.

"The [five-year] CDS moved wider pretty aggressively today and overnight especially," he said on Tuesday.

The five-year CDS widened from Friday's close by 50 bps to 320 bps bid, 340 bps offered.

The dong was seen trading at 16,215.03 to the dollar.

In the Philippines, commodity prices pushed the total of imported goods into the country to $5.1 billion in March, up 12.1% from $4.5 billion in March of 2007.

Exports also moved higher by 2.7% to $12.5 billion leaving a $2 billion total deficit, according to the national statistics office.

The Philippine sovereigns due 2030 added 0.125 point to 130.25 bid, 130.75 offered.

In Indonesia, an Infobank Magazine study showed that banks that saw record-setting profits in 2007 are expecting a downturn in 2008, the Jarkata Post reported.

Across the financial sector, profits hit $3.5 billion in 2007, up 14.3% from 2006, the report said.

"After Bank Indonesia reduced the interest rate, the banks reduced the saving interest rate while maintaining the lending interest, thus making a high interest rate profit margin. Banks also expanded fee-based incomes," said the director of Infobank's research bureau, Eko Supriyanto.

Inflation is expected to take a toll on banking profits in 2008.

Since the government cut subsidies for fuel prices, inflation is now forecast between 9% and 12%.

The new inflation figures may force central bank rate hikes, hampering lending.

The rupiah was seen trading at 9,353.04 to the dollar.

The Indonesian government bonds due 2017 were better by 0.375 point to 101.375 bid, 102.125 offered.

Politics, inflation hurt LatAm

Prices in Argentina dropped after talks broke down over the weekend while protests continued to rage over higher export tariffs, the Buenos Aires Herald reported.

Cabinet chief Alberto Fernandez said that the aggressive tone of the farmers' weekend rallies prevented constructive dialogue.

The government has no discernable strategy, a market source said.

The aggressive tone of the farmers should not have been a surprise to the government, and their reaction should not have been so unrehearsed, he said.

Without any consensus within the government, the mutually negative compromise has been to do nothing and wait, he said.

Argentine credit will continue to be pressured as the market looks unfavorably on the country's political situation, he added.

Meanwhile, the government also reported a trade surplus of $864 million in April, 30.1% lower than in April 2007.

The 8.28% Argentine discount bonds due 2033 fell 0.9 point to 80.35 bid, 81.35 offered.

Also in Mexico, the government announced a program to give some of the poorest families a monthly stipend of 120 pesos per month, according to the BBC.

The assistance will be given to about 26 million people and can be compared to the 50-peso-per-day minimum wage.

Also, inflation grew at 4.55%, the highest rate in three years, for the 12 months ended April 30, the report said.

The peso was seen trading at 10.376 to the dollar.

Venezuela's 9¼% bonds managed to climb 2.25 points to 93.5 bid, 94.5 offered.

Brazil not seeking SWF?

In Brazil, after having gone back and forth many times over the issue, president Luiz Inacio Lula da Silva reportedly postponed the creation of a sovereign wealth fund (SWF), a market source said.

With an eye toward inflation fighting, Lula allowed the deadline for submitting the proposal for the fund to expire on Monday.

Lula may also prefer to dedicate surplus funds to a 10 billion real health care bill, which is in Congress, the source said.

Congress may be able to create a new tax similar to the CPMF tax to fund the health care bill with only 50% of the vote, rather than the 60% it now requires.

The legality of passing such a cumulative tax with 50% of the vote is still under consideration.

The 7 1/8% Brazilian sovereign bonds due 2037 were lower by 0.3 point at 113 bid.

XXI Century prices $150 million

The primary shuddered awake after the long weekend with a major-currency deal. XXI Century Investments Public Ltd. priced a $150 million two-year bond at par to yield 7%.

The bonds will carry a coupon of 7% until Aug. 25, when the coupon steps up to 14%.

ING acted as bookrunner for the deal, which was downsized from $175 million and talked at 10%.

The deal carried warrants, which may be exercised at a price to be determined before Aug. 12.

XXI Century is a Kiev-based real estate investment firm.

"It's a horrible time to bring a deal with half of the U.S. on vacation," a buyside source said.

"Deals like that are probably going to have a harder time," the buysider said about deals from lesser-known issuers.

In local-currency deals, Israel's American Israeli Paper Mills Ltd. announced that files are shelved for an issue of up to NIS 1 billion in series 3 to 7 debentures.

The company also may issue 10 million warrants of series A to D which may be converted into one ordinary share and one-million warrants of series E to H exercisable into debentures with principal amount of NIS 100.

The firm is a Hadera, Israel-based paper producer.

Also, UAE's Aldar Properties PJSC (A3/A-/) announced plans to offer its debut dirham-denominated sukuk.

Abu Dhabi Commercial Bank, Barclays, Credit Suisse, Dubai Islamic Bank, First Gulf Bank, Lehman Brothers, National Bank of Abu Dhabi and Noor Islamic Bank will act as bookrunners for the deal.

A roadshow began on Tuesday in Abu Dhabi, Bahrain and London.

Aldar is an Abu Dhabi-based property developer.

Emerging Europe weaker with inflation

Emerging Europe traded slowly over rising inflation fears on Tuesday.

In Russia, president Dmitry Medvedev told finance minister Alexei Kudrin that "the task of curbing inflation is now a key task of the government," according to the RIA Novosti News Agency.

Total inflation for 2008 amounts to 7.2%, the report said, but Medvedev insisted that it is kept under 10.5% for the year.

In 2007, the government broke its goal of 8% as inflation topped out at 11.9% on rising commodity prices.

The ruble was seen trading at 23.635 to the dollar.

The Russian sovereigns due 2030 were seen trading lower by 0.35 point to 114.325 bid, 115 offered.

In Georgia, the U.N. reported that the Georgian air force drone shot down on April 20 was destroyed by a Russian MiG-29 fighter.

The Russian government denied responsibility.

Since the incident, tensions over the breakaway Abkhazia region have brought accusations from the Georgian government that Russia is attempting to annex the ethnically Russian region.

In Turkey, the case brought against the AK Party will cost the economy half of its estimated foreign investment, prime minister Recep Tayyip Erdogan told reporters, according to the Turkish Daily News.

The 2008 figure was revised to $12 billion from $25 billion, Erdogan said, as investors are being scared away by the specter of political risk, he said.

The Turkish government has been looking for revenue from other sources, the report said.

After minefields are cleared along the Syrian border, the land will be opened for agriculture.

"We may even trade wheat for oil," Erdogan said, adding that he hopes for closer ties to many Gulf states.

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