Emerging markets hold in; Emerging Europe strong; Argentina bonds strengthen; Pipeline runs slowly

By Aaron Hochman-Zimmerman

New York, July 7 - Emerging markets held its own on Monday as equities initially rallied but fell off the cliff on sour outlooks for Fannie Mae and Freddie Mac.

San Francisco Federal Reserve president Janet Yellen also joined in with a prediction of further deterioration in the U.S. economy before 2009.

In trading, emerging Europe used timing to its advantage as it found a comfortable harbor after a strong Asian overnight and before the afternoon drop-off in the U.S. markets.

Still, despite its political upheaval and its strong inflation numbers, Argentina was the high-beta leader as it posted a 0.75 point gain to its benchmark discount bonds due 2033.

In the primary, Brazil's Banco Daycoval SA, Cayman Island branch, announced a dollar-denominated three-year bond offering.

"It's still kind of closed," a trader said about the new issue pipeline as the market heads into the summer months.

Meanwhile, on a wild day for equities, volatility soared in the afternoon but trailed off to end up only 0.98 at 25.78, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets widened by 1 basis point to a spread of 301 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Emerging Europe rides Asian wave

"It is absolutely quiet," a trader said about emerging Europe. "The summer holidays are in front of us."

The trader said he expects very little from the primary market but the secondary will have occasional positive days.

"It's driven by the [United] States today," he said, "but what was astonishing was the Asian markets held up quite nicely overnight and gave some support to the European markets."

The overall picture is still threatening, he said. "Everything in the newspapers is negative," but "people are trying to find some kind of bottom here."

"I don't think it's over yet," he said about the bear market, but there will also be "a few nice days" mixed between the difficult days.

In Russia, president Dmitry Medvedev met with U.S. president George Bush over the weekend at the G8 summit in Japan.

The two discussed mostly political issues, including North Korea's nuclear capabilities and the United States' controversial missile defense plan.

However, during a meeting with British prime minister Gordon Brown, the discussion was reportedly focused on the rights of international corporations.

According to Medvedev's aide, Sergei Prikhodko, the two discussed the recent expulsion of TNK-BP executives from Russia, reports said.

The Russian sovereigns due 2030 were quoted at 112.125 bid, 112.5 offered.

Elsewhere in Turkey, the media continued to report concerns over political risk to the economy as the ruling AK Party fights for existence in constitutional court.

Arrests of two retired generals, a top journalist and others in a coup plot have also damaged the country's standing, but some have suggested that the arrests were carried out by the AKP dominated Interior Ministry in order to stain the reputation of the army, the Turkish Daily News reported.

Still, few are expecting a serious coup attempt by the army.

In eight weeks, the Turkish sovereigns have lost 12.5 points. On Monday the bonds were seen trading at 140 bid, 140.75 offered.

LatAm opens week slowly

"It's quiet; the U.S. market took the wind out of the sails," a syndicate official said.

In Argentina, the government's sale of its dollar reserves, which it used as a weapon against striking farmers, touched off a rally in the peso.

"I don't have a very good opinion of her," the official said about president Cristina Kirchner.

The peso was seen trading at 3.004 to the dollar.

Also in Argentina, the lower house of the legislature passed the bill containing the export tax hikes on farm goods.

The farmers appose the bill and hope that it at least is modified when it is debated in the upper house.

The 8.28% Argentine discount bonds due 2033 added 0.75 point to 75.5 bid.

Meanwhile in Venezuela, the Catholic Church blasted a Reformed Catholic Church created by Anglicans and Catholics, which supports president Hugo Chavez, the BBC reported.

The new church was created by Anglicans and Catholics who are focused on fighting poverty and support Chavez's social programs.

The Catholic Church, which has many members in Venezuela, has often been critical of Chavez as well for his authoritarian behavior, the report said.

The 9¼% Venezuelan sovereigns due 2027 added just 0.1 point to 95.1 bid.

Also in Latin America, Brazil's highly traded 11% bonds due 2040 were quoted at 132 bid.

Primary dog days?

With the passing of the Independence Day holiday in the United States, the new issue market may be ready to enter its typically slow summer period.

The historically low tempo will likely be encouraged by a weak U.S. equity market and a recent deluge of supply in June.

"Over the next four to six weeks we will have a bit of a slowdown," a trader said, adding that the wash of supply that has hit the market, especially in emerging Europe, needs to be absorbed.

Although the market is slow, "there're deals out there," a syndicate desk official said.

Meanwhile the Cayman Island branch of Banco Daycoval SA (BB-/BB-) announced plans to issue a dollar-denominated three-year bond.

Banco Itau Europa, Banco Votorantim and HSBC will act as bookrunners for the deal.

Banco Daycoval is a Sao Paulo-based retail and commercial bank.

"It's a follow-on," a market source said.

The bank priced $65 million two-year 6 7/8% bonds, upsized from $30 million, on Dec. 7, 2005.

Also, Singapore's Hyflux Ltd. announced that DBS Bank and Standard Chartered will manage a S$300 million medium-term debt program.

Hyflux is a Singapore-based water treatment firm.

Also, Israel's American Israeli Paper Mills Ltd. (AA-, local) announced that it may change the size of its previously announced NIS 150 million debenture offering.

The news release cited market conditions for the possible change in the deal's size.

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

Asia slips on inflation

Asia traded with the benefit of a strong overnight session in the local markets but was plagued by rising inflation and commodity costs.

In the Philippines, inflation set a 14-year record in June as it reached 11.4%, revised from 9.5%, according to a statement from the central bank.

The jump left the average inflation figure for 2008 at 7.6%.

"Food and oil prices continued to push inflation higher in June," the statement said, adding that typhoons have hurt fishing and damaged supplies of farm goods.

The bank still expects inflation to hit its apex in the third quarter and taper off into 2009.

The peso was seen trading at 45.54 to the dollar.

In Indonesia, the country's real estate market was rated 55 of 82 for market transparency by LaSalle Investment Management, according to the Jakarta Post.

"We do not even have figures to tell us the size of the property market and the current level of foreign investment," said Anton Sitorus, LaSalle's head of research.

"If there is legal conflict, the legal process still involves bribes and corruption. Foreign investors are often being disadvantaged, so many choose to wait on the sidelines until they perceive that the situation is conducive enough," he added.

Other countries in the region, such as Vietnam, ranked lower for transparency the survey showed, but were still more favored by investors for higher growth potential.

The rupiah was seen trading at 9,193.18 to the dollar.

In Pakistan, the government announced that it may take steps to curb illegal price hikes for compressed natural gas, the BBC reported.

An initial government hike raised prices by 36% to 52 rupees per kilogram, but the increase was quickly scaled back to leaving the price at 43 rupees.

Some station owners have been charging 68 rupees, the report said, in order to cover taxes and other costs.

The rupee was seen trading at 71.81 to the dollar.

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