Emerging markets turn lower; South Korea to sell benchmark dollar-denominated bonds; spreads widen

By Aaron Hochman-Zimmerman

New York, April 7 - Emerging markets completed a reversal in fortune the sector began on Monday as Tuesday's session was convincingly a negative reaction to the market's recent rally.

"It's broken out of a range," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The market needed to test its gains and now investors will have to suffer through a "sellback and consolidation," he said.

The shortened week is also full of religious holidays, which has left desks undermanned and a prevailing low liquidity, he said.

It gives many investors "a little bit of leeway to press the downside," he said.

In trading, the Philippines, which had created a sharp upward trajectory for its bond due 2030, was hammered down by 3 points to 119 bid.

Meanwhile in the primary market, the Republic of Korea talked a five- and 10-year dollar-denominated benchmark-sized deal expected to price early during Wednesday's session in New York.

From the major markets, volatility crept lower by 0.54 to close the day at 40.39, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets widened by 8 basis points to a spread of 576 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

South Korea brings benchmark

Asia "has been OK," a trader said, with "more sellers than buyers" on Tuesday.

The usually resilient category continued to provide the primary action as South Korea's two-tranche benchmark-sized deal followed Monday's issue from China's Hutchison Whampoa Ltd.

South Korea announced talk for its dollar-denominated five- and 10-year benchmark-sized offering in the Treasuries plus 400 bps area and Treasuries plus 437.5 bps area (A2/A/A+), respectively.

Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch and Samsung Capital will act as joint bookrunners for the registered deal.

The bonds are expected to price Wednesday.

Proceeds will be used for selling and purchasing foreign currencies and for depositing or lending to the Bank of Korea.

"They'll need local support for the fives, but the tens should do fine," the trader said.

Meanwhile, the new 7 5/8% Hutchison Whampoa bonds due 2019 were seen wider at 485 bps bid, 480 bps offered.

The bonds originally priced at a spread of Treasuries plus 475 bps and immediately tightened to 467 bps bid, 463 bps offered.

Asia sees selling

Meanwhile in the Philippines, headline inflation fell to 6.4% in March from 7.3% during February, according to a statement from the central bank.

The number falls within the central bank estimate, which the bank "will consider as it assesses its monetary policy actions in the near term," it said in the statement.

Year to date, average inflation now stands at 6.9%, down from 7.1% at the end of February.

Both falling commodity and energy prices helped pare down inflation.

The Philippines benchmark bonds sank 3 points to 119 bid, 120 offered.

Meanwhile, Indonesia's bonds due 2019 were unchanged at 111.5 bid, 112.5 offered.

"We're just getting knocked around by all of the other stuff," the trader said about the external markets' effects on the sector.

LatAm slips, 'no major damage'

Latin America traded "a little soft as far as price action is concerned," said IDEAglobal's Alvarez.

Despite the losses on the equity side, there was "no major damage done to the advances of last week," he said.

Peru may see some fallout from the sentencing of former president Alberto Fujimori to 25 years in prison for the deaths of dozens of political opponents and other human rights violations, he said.

President Alan Garcia is up for re-election, and although the vote is expected to be "a one-way bet," the conviction of Fujimori will be polarizing and mildly destabilizing, Alvarez said.

Fujimori's daughter Keiko Fujimori is expected to challenge Garcia for the presidency and has suggested she would pardon her father if elected.

The 8 3/8% Peruvian bonds due 2016 were unchanged at 111.5 bid, 112.125 offered.

In recent days, Venezuela has seen nearly $4 billion worth of oil investment interest from Japan and new talks with China, but oil prices below $49 per barrel helped to drag down the bonds.

The 9¼% Venezuelan bonds due 2027 fell by 0.875 point to 60.45 bid, 61.125 offered.

Also in the category, Brazil's 5 7/8% bonds due 2019 lost 0.375 point to 98.3 bid, 98.95 offered, while Argentina's 8.28% discount bonds due 2033 were nearly unchanged as they lost 0.05 point to 27.625 bid, 28.45 offered.

Emerging Europe sells off

Emerging Europe felt the risk-rejecting reaction on Tuesday as investors tested the market's long rally that closed out the first quarter.

In Russia, officials from NJSC Naftogaz Ukrainy and OAO Gazprom met in Moscow to hammer out a gas transit agreement, according to reports.

Ukraine agreed to buy Russian gas through 2019 and will receive a 20% discount to market price. In exchange for the discount Ukraine is bound to the current tariff rate it charges the West for transport of Russian gas.

Meanwhile in Turkey, the sentiment that helped drive up markets all across the country on Monday seemed to leave along with U.S. president Barack Obama.

Turkey's recent successes were subject to profit taking on Tuesday as it fell across the board.

The lira was seen trading at 1.6007 to the dollar.

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