EM works past rough morning; trading ends on upswing; primary prices $2 billion

By Aaron Hochman-Zimmerman

New York, Oct. 18 - Emerging markets tripped out of the gate, but picked up a nice stride to end the day.

"We actually had a pretty reasonable day in emerging market land," a portfolio manager said.

In trading, Argentina "blew out and came back," a trader said, but by the end of the session the high-beta 8.28% discount notes led trading with 1.25 in gains.

In the primary market, Petróleos Mexicanos easily overshadowed the other issuers with terms emerging from a late Wednesday deal for two tranches worth a total of $2 billion. Meanwhile, three other issuers announced their intentions to bring deals to market.

The day's most noticeable headlines came from the political sphere where Turkey and Pakistan are either on the verge of or in the midst of serious conflict.

Pakistan's bonds suffered mildly from the attacks on former prime minister Benazir Bhutto's motorcade, but in general the market has been spared knee-jerk reactions to political upheaval.

Even volatility, which spiked in the morning, came back down as the market tightened at the end of trading, according to the VIX index which closed down 0.04 at 18.50. The VIX index is the standard measure of market volatility.

As a whole emerging markets hardly flinched at either political instability or the ambitiously climbing price of oil. JP Morgan's EMBI+ index widened out by only 2 basis points to end with a spread of 194 bps. The EMBI+ gauges how much yield investors demand to hold emerging markets debt.

Europe flat, Turkey ruffling feathers

European trading was mostly unchanged, but the fireworks continued to surround Turkey which has provided the concern for market watchers in recent days. However, Thursday the intrigue came more from the Kurdish side as demonstrators in Erbil in northern Iraq protested a possible Turkish incursion.

Some of the thousands of marchers vowed to resist with force any Turkish military presence in Iraq.

Talks between the Turkish and Iraqi governments were positive, but the preeminence of the Baghdad government in the north is doubtful, according to a market source.

There seems to be no inclination on the part of Iraqi Kurdish leaders to act against the separatists of the Kurdistan Workers' Party (PKK), the source said.

Turkey's prime minister, Recep Tayyip Erdogan, has said that military action may not be necessary and the United States appears to be only coming as close to the conflict as necessary, a market source indicated. Therefore the situation is left mostly in the hands of the PKK itself to push the conflict in either direction by resuming its attacks on Turkish authorities or accepting the status quo.

Economically in Turkey, the government is expected to unveil a cut in the primary surplus target to 5.5% of its GNP, down from 6.5%.

LatAm slow start, finishes strong

Latin America bounced back from a rough morning along with equities and currencies to post some slight gains or at least break even.

Oil prices kept driving higher towards $90 per barrel, but the big price tag was good news to oil producer Venezuela, where president Hugo Chavez's proposed reforms to the constitution will soon face voting in parliament.

The reforms further prop up presidential influence over the economy and central bank as well as remove the term limits on the presidency.

The motion would also guarantee a maximum six-hour work day for Venezuelans.

In Argentina the government published new limits on pension funds which invest outside of the country.

The new policy will translate into the return of 8.5 billion pesos to Argentina, a market source said, adding most of that money is currently invested in Brazil.

In the future pension funds will only be permitted to invest 10% of its money abroad.

President Nestor Kirchner made the announcements even as Brazilian president Luiz Inácio Lula da Silva attended a free trade summit between India, South Africa and the mercosur countries in Pretoria, South Africa.

The 8.28% Argentine government bonds due 2033 were the strong performers on the session. The issue gained 1.25 and was seen trading around 95.50.

Brazil's highly traded 11% sovereigns due 2040 gained 0.60 on the back of a strong real.

The bonds were quoted at 134.70 bid, 134.80 offered.

The real was seen at 1.804 to the dollar.

Asia sturdy, Pakistan hurt by blasts

Asian trading held flat to mixed outside of Pakistan, where terrorism made its presence felt in the bond market.

Recent strong performances by Pakistan's sovereign bonds may have come as a political shake-up looked to provide the country with a more democratic government.

Violence was not far behind the anticipated return of the exiled Benazir Bhutto as 20 were killed and 60 wounded as terrorist bombs exploded around her motorcade.

Pro-Taliban groups have made threats against Bhutto, who is expected to push Pakistan towards a more liberal government, reports the BBC.

Bhutto and sitting president Pervez Musharraf have worked out a deal, supported by the United States, to share power which would restore Bhutto as prime minister of the predominantly Muslim country.

Political risk certainly was the downside in Pakistan, a trader said.

"In terms of a reaction it's a little bit hard to say, Pakistan is not liquid at the best of times and there have been no prices post [the bombings]," he said.

Pakistani five-year CDS were trading around 270 bps, but now things may widen out 25 or 50 bps, he said.

The Pakistani sovereigns due 2017 were seen trading off 0.5 at 93 bid, 94 offered, but now may be up to 1 lower, the trader said.

Still, Indonesia managed to have a positive day. The government bonds due 2035 were up approximately 0.5, trading around 121 bid, 122 offered. The sovereigns due 2017 were quoted at 105.375 bid, 105.875 offered.

Elsewhere, in the Philippines, the benchmark bonds due 2030 slipped about 0.25 to trade around 133.25 bid, 134.25 offered.

In corporates, MagnaChip Semiconductor LLC continues to enjoy a lift from its positive third quarter numbers and fourth quarter projections.

The company's 8% notes due 2014 added another 1 to trade at 74.5.

Pemex prices, more join the queue

The primary managed to produce $2 billion in new issuance late Wednesday, but from only one deal. During Thursday's session, three others attached their names to the calendar as the market sentiment saw a little more sunshine.

Mexico's Petróleos Mexicanos (Baa1/BBB+/BBB) priced a $1.5 billion issue at 99.316 to yield 5.84% and a $500 million retap at 103.697 to yield 6.339%.

The 5¾% $1.5 billion 10-year bonds priced on the tight end of the talk at Treasuries plus 128 to 130 bps.

The $500 million retap of the company's 6 5/8% notes due in 2035 priced on its talk at 150 bps over the 4¾% Treasuries due February of 2037.

Credit Suisse, Deutsche Bank and Merrill Lynch had the books for both deals.

Proceeds will be used to fund tender offers.

Pemex is a Mexico City-based state-owned oil monopoly.

Argentina's Banco Macro SA will offer up to $100 million of class 4 notes (B2/B+) due 2014 under its $700 million global notes program.

Citigroup Global Markets and UBS Securities LLC will be the placement agents outside of Argentina and Citicorp Capital Markets SA and Raymond James Argentina Sociedad de Bolsa SA will be the local placement agents.

The issuer is a Buenos Aires-based retail and commercial bank.

South Korea's Pusan Bank announced plans to issue dollar-denominated 10-year lower tier II subordinated notes (A3//BBB).

Citigroup, Korea Development Bank and UBS are the joint bookrunners for the deal.

The bonds feature five years of call protection and a step up at the first call date of 100 basis points plus the initial Treasuries spread plus the prevailing five-year Treasury rate.

Proceeds will be used for general corporate purposes.

Pusan Bank is a Busan, South Korea-based retail and commercial bank.

Also in Asia, Philippines' Quezon Power Ltd. announced plans to sell $100 million in subordinated notes.

Further details about the deal have not yet been released.

Quezon Power is a Manila-based energy provider.

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