CPI numbers trigger wide-spread sell-off; Korea South East Power talks $300 million; Fosun returns

By Paul A. Harris

St. Louis, May 17 - Inflation fears triggered by U.S. Consumer Price Index data that came in higher than analysts had been expecting prompted wide-spread selling throughout the Wednesday emerging markets session, sources said.

"EM is getting clobbered across the board this morning on the CPI news," an analyst wrote in a Wednesday morning email message.

The source added that at that time levels were coming back to their Monday intraday lows, with Brazil and Turkey down 1.5 points apiece.

"And Argentina pars (which started the day at 35 cents) are down almost 2 cents, which is a huge downward move for such a low dollar price asset," the analyst.

"The local markets are also getting hammered. In general, it's a fire sale this morning.

"Things can definitely turn around if U.S. Treasuries and/or equities turn around, but inflation fears have got everyone spooked that demand for yield - especially demand for EM yield - is going to evaporate."

Volatility in local markets

At mid-afternoon, a sell-side official confirmed that point most of the volatility and most of the flows had been concentrated in the local markets.

"In the external debt market we have generally seen very little real-money selling, so it seems to be the trading-oriented accounts sort of pushing the market around from day to day," the official added.

"And there is a lot more fluctuation in the currencies than in anything else."

This source said that the JP Morgan EMBI-Plus index was seven basis points wider at 201 basis points.

Earlier in the session a source told Prospect News that Russian assets appeared to be holding in, in the face of the general rout, but the sell-side official took issue with that color, noting that Russia closes in the middle of the day New York time, when the worst of the equity sell-off was still to come. By the end of the day the Dow Jones Industrial Average had dropped over 200 points, or nearly 1.9%.

In any case, the sell-side official added, The Russia EMBI was at 115 basis points bid at mid-afternoon New York time, 3 bps wider.

A more generalized sell-off

Later Wednesday, less than 45 minutes before the New York close, an emerging markets investor concurred with the sell-side official's color that throughout the day the local markets had borne the brunt of the sell-off.

"Trailing the CPI numbers we saw local markets like Brazil and Turkey moving lower," the buy-sider said.

"But hedge fund activity was pushing the market lower toward the close, and you saw more of a general sell-off."

This source spotted Brazil's benchmark 11% dollar-denominated bonds maturing in August 2040 down two points from Tuesday at 124.10 bid.

The investor said that what the market saw Wednesday was wide-spread "risk-reduction," which began toward the middle of last week, starting with Turkey and spilling over into other countries.

A "risk-reduction" story

Shortly after the session's close a trader who focuses on Asian fixed-income assets also characterized the Wednesday sell-off as a "risk-reduction trade," and added that all risk assets were getting hit pretty heavily.

The trader added that "the higher-beta sections of the market" were hit quite hard, with the Philippines down pretty aggressively. On the cash-side, the long end of the Philippines curve was down 4¼ points on the day from the Asia close. Meanwhile the Philippines five-year credit default swaps were 20 basis points wider, which the source characterized as "a pretty significant move."

However the trader was quick to point out that the Wednesday sell-off needed to be viewed in context.

"It's exaggerated because emerging markets is coming off of such tight levels," the source asserted, adding that the Philippines is 40-odd basis points wider on the week, but only back at levels seen during the last week in April.

"You have to keep this in perspective. Some of these risk markets had gone absolutely parabolic at the end of April and in early May.

"Now we are just seeing the market taking that back."

Pensiveness in the primary

The trader said that present market conditions could make the going rockier for prospective issuers, especially those with comparatively low credit ratings.

No deal terms were heard during the Wednesday session. The preponderance of news seemed to emanate from Asia by way of Europe, well before the coffee began percolating on Wall Street.

Korea South East Power Co. Ltd. talked its $300 million offering of 10-year notes (A2/A-/A-) at a 47 basis points to 50 basis points spread to mid-swaps.

The deal, which is being led by Barclays Capital, Citigroup and Credit Suisse, is expected to launch and price on Thursday. The deal size will not grow.

Also from South Korea, National Agricultural Cooperative Federation (NACF) was heard to be heading to the market with a $300 million to $400 million offering of lower tier II subordinated notes, via BNP Paribas, Calyon Securities and Merrill Lynch.

In May 2005, NACF priced a $400 million offering of 5 1/8% lower tier II notes (Baa1/BBB) at mid-swaps plus 100 basis points.

The return of Fosun

Chinese conglomerate Fosun International Ltd. is poised to return to the global bond market with a $500 million offering of seven-year notes similar to the one that it postponed last October, according to a market source.

The source, speaking well before the Wednesday sell-off had gotten underway in New York, said that the timing of the deal could be imminent.

Deutsche Bank and Citigroup will lead the deal.

In mid-October 2005 the Shanghai-based company postponed an offering of seven-year senior notes (Ba3/BB-), but not before downsizing it to a $325 million to $350 million range from an initial deal size of $500 million. Guidance on the postponed deal, which was being led by bookrunners Morgan Stanley and Citigroup, ended at the 9% area, up from the initial guidance of 8½% to 9%.

With regard to prospective Latin American corporate issuers, a sell-side source suggested that it might be prudent to let the dust of the Wednesday sell-off settle somewhat before heading to the block.

Brazilian steel firm Gerdau SA's $400 million offering of 10-year notes (Ba1/BB+/BB+) had been expected to price before the end of the week, via JP Morgan.

On Wednesday an informed source told Prospect News that, had the widespread emerging markets sell-off not occurred, price talk might have come out on Thursday, but is now more likely to emerge on Friday or early next week.

The source added that on the roadshow investors have largely had a "love the company, hate the market" response to Gerdau.

The source added that the Brazilian steel company, which has $2.5 billion of free cash, is using proceeds from the new bonds to prepay debt, rendering the deal "an entirely opportunistic financing from the company's standpoint."

Meanwhile, the source said, Banco de Chile's $200 million offering of 10-year subordinated lower tier II notes (/BBB+/A-), which has also been roadshowing this week via Deutsche Bank, should also get done.

However, the source said, "it's still a market where people require a new issue premium, and an issue like that figures to be comparatively price sensitive."

Market wants clarity

Finally, a trader reflecting late Wednesday on the emerging markets sell-off and the CPI numbers that sparked it, said that if the Federal Reserve concludes that it should continue tightening short-term interest rates to stave off inflation it may not be such a bad thing.

The emerging markets would prefer that the Fed keeps going until it becomes clearer that it is really finished tightening for the cycle, the source said.

"The whole concept of a pause would just prolong the uncertainty on rates.

"If what happened today increases the chances that the Fed will continue to move, I think it will cause near-term problems. But for the longer term stability of the market it's probably not a bad thing."

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