EM prices slightly higher but spreads widen as gains lag Treasuries; Cap Cana pulled with two others

By Aaron Hochman-Zimmerman

New York, Nov. 9 - Emerging markets were up slightly in Friday's abbreviated session but spreads widened as the rise failed to match the bigger rally in U.S. Treasuries.

The primary saw another bloodbath, as it lost three deals from the pipeline including a $500 million offer from the Dominican Republic's Cap Cana SA.

Despite the recent loss of seven deals, the week ending Wednesday posted $286 million of inflows to emerging markets, according to EPFR Global. The gains make the second week in a row of inflows.

"EM bonds and especially equities continues to hold up nicely amid the market deterioration," according to an EPFR Global analyst.

There have been "big outflows from U.S., Europe and Japan equity funds ... the two groups seeing the strongest inflows are EM equities and money market funds; we live in strange times," he said.

"The money market fund inflow does indicate there is plenty of cash on the sidelines to be deployed if things settle down."

There is "$20 billion into money market funds this week, and $150 billion year to date," he said.

In trading most issues were mixed and unchanged, but in general "bids are a little firmer," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"They're not overly affected by what's going on in U.S. credit markets," he said about emerging markets credits.

Still, "I think things are too dicey and jittery to ignore them," he said.

"It looks pretty sick," a trader said about the impact of macroeconomic conditions - notably in the United States - on the market.

Some experts have said "it's past the tipping point and we are going see it in the data in the next few months," the trader said.

Recently weakness in the dollar has contributed to a narrowing of the trade deficit between the United States and its trading partners. That may begin to encourage a strengthening dollar on stronger U.S. exports.

According to some, the dollar is a both a problem and a solution in itself. "It's like a beer," a trader said.

In the near-term "stocks look poor," the trader said, and "volatility is creeping back up again."

Volatility was seen up approximately 0.25 to 26.41 on the day, according to the VIX index. The index is the accepted measure of market volatility.

As U.S. Treasuries were up, so were spreads as indicated by JP Morgan's EMBI+ index. Even though prices were marginally higher across emerging markets, the EMBI+ was 4 basis points wider at a spread of 220 bps, its highest level since Sept. 17.

The EMBI+ gauges the amount of extra yield investors demand to hold money in emerging markets debt.

Issues are "higher in cash," but "anyone who hedges against Treasuries is losing money," the trader said.

Prices higher, spreads wider in emerging Europe

Trading in emerging Europe saw another afternoon recovery, although "it is widening," with "not a lot going on, it's still drifting ... it's been hit," a trader said.

"People are more fearful than greedy," he said.

All of the deals pulled from the market Friday were Latin American, but "it tells a story, doesn't it?" the trader commented.

For another day Turkey refrained from any involvement in northern Iraq, despite what seemed like a commitment to an incursion after talks between prime minister Recep Tayyip Erdogan and president George Bush on Nov. 5.

The country's benchmark government bonds due 2030 were spotted unchanged at 157.75 bid, 158.25 offered.

Russia's sovereigns due 2030 took on approximately 0.25 to trade around 113 bid, 113.125 offered.

However, "CDS is drifting north on the benchmarks," the trader said.

The Russian five-year CDS widened approximately 10 bps to a spread of 141 bps.

'Little pullback' in LatAm

"You've had a little bit of a pull back," in Latin American trading, said IDEAglobal's Alvarez.

"Where you're seeing the softness is in the dollar instruments that trade locally," he said.

Even though Latin America has in some ways managed to avoid the landmines laid down by the banking sector, "Tuesday may be more normal when you have full trading staffs on hand," he said.

"On the sovereign side, I can't say that you've seen a lot," he said.

Argentina's 8.28% discount bonds due 2033 were up about 0.5 to trade around 95 bid, 95.5 offered.

Venezuela's 9.25% sovereign bonds due 2027 were up 0.25 to trade at 104.45 bid, 105 offered.

In Brazil, the government's oil-producer Petroleo Brasileiro SA or Petrobras, made an off-shore oil discovery which may increase Brazil's reserves by 40%.

The find may make Brazil the world's eighth-largest oil-producing nation, said Petrobras' president Sergio Gabrielli.

Approximately 8 billion barrels of recoverable light crude are contained in the Tupi oil field under the Atlantic Ocean.

The Brazilian bonds due 2037 shed 0.2 and were quoted at 113 bid, 113.3 offered. The sovereigns due 2040 were spotted at 133.5 bid, 133.6 offered.

Asia mostly unchanged

Asia was largely unaffected by the headlines from the major markets, which included a $1.7 billion reported loss from Wachovia.

The Philippines' government bonds due 2037 were seen with a bid of 96.

In Pakistan, former prime minister Benazir Bhutto was released from house arrest, according to a BBC report.

Bhutto has been leading an ongoing fight against the state of emergency declared by president Pervez Musharraf.

In corporates, Singapore's industrial materials producer Sulzer Metco was spotted trading at 102.25.

Primary leaves three more on roadside

"Deals can't get printed," a trader said about the frightful primary market.

The primary suffered the loss of four deals on Thursday and another three on Friday.

Cap Cana SA pulled its $500 million 10-year senior secured notes (B3//B-) talked in the 11¾% area.

Deutsche Bank and Morgan Stanley were scheduled to act as bookrunners for the deal.

The bonds had a weighted average life of eight years and six months.

Proceeds were intended to fund a debt service reserve account and for working capital.

Cap Cana is a Santo Domingo, Dominican Republic-based resort.

Banco Macro SA postponed its $150 million seven-year senior class 4 notes (B2//B+).

Citigroup and UBS had the books for the bonds off of the company's $700 million global notes program.

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

Sanluis Corporacion SAB de CV withdrew its offer of $275 million 10-year bonds (B2//B) talked in the 11½% area.

Morgan Stanley would have acted as the bookrunner for the deal.

The bonds would have featured five years of call protection.

Proceeds were intended to refinance existing debt.

Sanluis is a Mexico City-based auto parts manufacturer debt.

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