Emerging markets off with U.S. stocks but support impresses; Turkey drops; primary awaits benchmarks

By Aaron Hochman-Zimmerman

New York, Oct. 15 - Emerging markets suffered a difficult session Monday as stocks in the United States dealt a setback to what remains a generally optimistic market.

The bruises to the market may be superficial as emerging markets were "better supported than we thought," a syndicate official said.

The real test will be Federal Reserve Bank chairman Ben Bernanke's speech Monday night in New York, he said.

Investors watched bond values fall across all the emerging sectors, but Turkey which contributed political volatility to the day's session, led the losers.

The primary was quiet save for a few rumblings from bigger deals such as Colombia's Empresa de Energia de Bogota which announced a seven to 10-year maturity for its upcoming benchmark offer.

Because of Citigroup's report of a 57% decline in earnings the market looked worse than it is, said a syndicate desk official who specializes in Latin America.

Recently, "the market has acted like August never happened," he said.

Until actual corporate defaults pick up, maybe in the first quarter of next year, the market should not see a repeat of the severe August decline, an emerging markets strategist said.

Early in the day another market source said he expected volatility to continue its drop, although the source conceded there is "a substantial amount of uneasiness in the market."

The latter seemed to be the case in the afternoon as the VIX index, the accepted measure of market volatility, jumped to within an eyelash of 20.00.

By the end of the day, the index gained 1.52 to close at 19.25.

Overall, emerging markets followed the Dow Jones Industrial Average on its way down. The Dow lost 108.28 to end at 13,984.80.

JP Morgan's EMBI+ index was seen approximately 5 basis points wider at 185 bps. The index measures how much extra yield investors require to keep money in emerging markets.

Europe slips, Turkey to vote on military action

European bonds fell on risk aversion caused by rising oil prices and falling stocks in the United States.

Turkey, which reportedly shelled Kurdish strongholds on the Iraqi boarder, inched closer to military action against Kurdish forces within the boarders of Iraq. Unlike in recent weeks, when Turkish threats have been largely ignored, the military action may have provided the fuel to send volatility and oil prices soaring to new highs.

Also, this week the Turkish parliament will vote to determine if it will allow the military to invade Iraq in pursuit of Kurdish separatists.

"Interesting developments on the Turkey/Iraq front ... It is hard to see where that will end up," an emerging markets strategist said.

Last week, bond prices did not react to friction between the United States and Turkey as the foreign relations committee of the U.S. House of Representatives voted to brand the killing of Armenians in 1915 as genocide.

However, as oil prices climbed over $86 dollars a barrel, the prices of the Turkish sovereigns due in 2030 dropped 0.75 to 156.50.

Oil ended at $86.47 per barrel.

Along with falling bond prices, a market source believes that interest rates in Turkey will have to be cut as the lira continues to rally.

The currency will likely suffer a slight setback if the central bank cuts rates, the source said.

The lira was trading up at 1.217 to the dollar on Monday.

In Kazakhstan, financial regulators said they plan to limit amounts that banks may borrow from foreign lenders, according to a market source.

Foreign money has opened Kazakhstan to damage from the credit crunch, the source said.

If there is another run on the nation's currency, that may result in even lower reserves and possible renewed pressure on the $20 billion-plus of outstanding Kazakh corporate bonds, the strategist added.

Latin America falls, but not far

Latin America was also dragged lower by the weight of falling stocks in the United States.

"It trades in sympathy," a syndicate official said.

Profits were taken after a strong week last week, but generally Latin America as well as Asia held in well, another syndicate official said.

The market may have been "a touch weaker," as "everyone was staring at the S&P and the Dow," he said.

Losses showed up on Argentina's door as president Nestor Kirchner again threatened to take action if banks did not loosen lending rates; the country's sovereign bonds turned in the worst performance of the high-beta Latin American credits.

Argentina's 8.28% government bonds due 2033 fell off about 0.70 and were seen trading at 93.75.

Venezuela's high-beta 9.25% bonds due 2027 lost approximately 0.25 and were trading around 107.75.

Brazil's bonds took losses as well, along with the value of the real. The currency which had seen recently traded at its high-water mark dropped down to 1.812 against the dollar.

Brazil's celebrity 11% sovereigns due 2040 lost 0.25, and traded near 133.65.

Colombia, Ecuador, and Mexico's bonds all saw losses as well.

Asia slips, but holding

Asian markets were lower with the other sectors, but also like the other sectors, did not fall as low as some had worried.

"There's still some decent support," a syndicate official said.

In the Philippines, where the peso's recent strong performance had sparked inflation concern, the benchmark sovereign lost about 0.25 on light volumes.

The government notes due 2030 ended at 133.50.

The peso was seen trading at 43.630 to the dollar.

Indonesia's government bonds lost 0.375 and closed at 105.25 bid, 105.50 offered.

Pakistan which has shown its ability to overcome political turmoil is still on the radar of Asian market watchers.

The Pakistani sovereigns due 2017 lost 0.50 to end at 94.00.

In China, president Hu Jintao announced the country's new economic policies at the opening of this year's party congress.

Hu intends to have the GDP quadruple in 20 years, do less damage to the environment as well as temper the extremes of rich and poor.

The economy is too dependent on investment and not enough on consumption, he added.

The speech may stir up the market in overnight trading, but did not have much of an effect on Monday's session, a syndicate source said.

In corporates, Korea's MagnaChip Semiconductor LLC saw its debt trade higher after the chip maker reported preliminary third-quarter results, which came in 3% above projected guidance.

That caused the chipmaker's bonds to gain as much as 3 points.

A trader quoted the floating-rate notes due 2011 up 2 points at 91.5 bid, 92.5 offered. At another desk, a trader said the bonds were up 2 to 3 points, its 8% notes due 2014 at 75 bid, 76 offered, its 6 7/8% notes due 2011 at 86 bid and the floaters at 89 bid.

Another trader called the 8% notes 1 point better at 73.5 bid, 75.5 offered, while its 6 7/8% notes were likewise up 1 point at 87 bid, 89 offered and its floating-rate notes at 90 bid, 92 offered.

In a press release, the Seoul, Korea-based company said it expected revenue for the third quarter to be around $200 million, 3% over prior guidance. The company also said it expects fourth-quarter revenue to increase 20% over the third quarter.

Primary keeps quiet

The primary rolled out one new deal over the noise of background murmurs about other deals waiting to price.

China's Coastal Greenland Ltd. announced its intentions to make a dollar-denominated bond offering with warrants.

The company HSBC is expected to run the books.

Coastal Greenland is a Hong Kong-based real estate developer.

Technicals are supportive for new deals, a strategist said.

"There has not been enough issuance and there is still nearly $35 billion of amortizations and interest income in [the fourth quarter of this year] to add to the underlying demand technical," he explained.

"Many investors I have spoken with have been on the sidelines just waiting to get back in ... If the market doesn't sell off and provide the favorable entry point, they will have to anyway," he said.

Other investors took note of two roadshows scheduled to end Tuesday, one for a sovereign offer from Sri Lanka and one for a benchmark-sized deal from Brazil's Gerdau SA.

Elsewhere, Empresa de Energia de Bogota announced a seven to 10-year maturity for its upcoming benchmark offer.

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