Emerging markets improve on slow trading; Argentina soars; U.S. recovery less vital to BRICs

By Aaron Hochman-Zimmerman

New York, June 29 - Emerging markets opened the week with positive trading, which moved at a crawl while the primary seemed sealed shut by empty syndicate desks.

Argentina was nearly alone on the stage as it added 5 points to its discount bond due 2033 following the news that the ruling Peronist party suffered a decisive defeat in Sunday's legislative elections.

Even former president Nestor Kirchner lost his bid for a legislative seat and subsequently resigned from the party chairmanship. The news seems to be a good sign for the country in the near term, but for the rest of the week, the action looks to be thin.

Going forward into the second half, predictions of a U.S. economic recovery in the third or fourth quarter are less relevant to major emerging market players than in the past.

"It's becoming more and more difficult to generalize," a buysider said, but "the bigger countries [BRICs] don't need the U.S. to come out of the recession...domestic demand is picking up."

Still, if the U.S. recovery comes late in the fourth quarter, especially in the equity markets, there may be "some sort of selloff," the buysider said, because "everyone is pricing in a perfect scenario."

"The market has come a long way in a short time," the buysider said, and "some profit-taking" in the early part of the half will be healthy.

Overall, "consensus is that we're starting to see a turn," the buysider added.

Meanwhile, from the major markets, equities opened the week well as volatility dropped another 0.58 to finish the day at 25.35, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets tightened by 6 basis points to a spread of 447 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Kirchners down, Argentina up

In Argentina, bonds were flying high after voters handed a defeat to the Peronist party of president Cristina Kirchner on Sunday.

President Kirchner does not stand for re-election until 2011, but her husband, former-president Nestor Kirchner, lost his bid for a Buenos Aires legislative seat.

The loss was seen as a rebuke of the Kirchners' leadership in favor of more right-center economic policies.

Following the loss, Nestor Kirchner tendered his resignation as chief of the Peronist party.

"In the medium term, it's positive," a buysider said about Kirchner's loss. "You never know what to expect from them."

"This defeat may make the Kirchners a little more practical and not do something radical," the buysider said.

The 8.28% Argentine discount bonds due 2033 jumped by 5 points to 63¼ bid.

LatAm looks ahead

Outside of Argentina, Latin America traded slowly on a week that many feel will end at lunchtime in New York this Thursday.

The pipeline will likely reopen in mid-August, a syndicate official said, "maybe some in July."

Deals that some expected to sneak through before the summer shutdown were nowhere to be found, he said about El Salvador and Panama.

"Mexico, definitely in the second half," he said about the prospects for new issuance, also mentioning Brazil.

Anecdotal evidence of banks rehiring added a broad dose of optimism.

"I'm starting to feel relatively bullish on the market," the syndicate official said.

The 11% Brazilian sovereigns due 2040 were quoted at 130¾ bid.

In Venezuela, president Hugo Chavez spoke out in support of fellow-leftist, Honduras president Manuel Zelaya, who was arrested by troops acting under the authority of the legislature.

Zelaya had been pressing a referendum that would extend his term limit, which was seen by the legislature as anti-democratic.

Interim president Roberto Micheletti assumed control with congressional support.

Leaders from around the region condemned the coup, including U.S. secretary of state Hillary Clinton.

The intrigue had little effect on credit levels, but "it's not great news for the Central American region," the buysider said.

The 9¼% Venezuelan government bonds due 2027 were seen at 67.3 bid.

Emerging Europe talks to E.U.

Emerging Europe also traded predictably slow but still improved along with a positive sentiment and equity strength.

In Russia, the export tax that is charged for the sale of oil will increase to $212.60 per ton from $152.80 per ton, according to reports.

The larger tax was approved by prime minister Vladimir Putin late of Friday.

The Russian sovereign bonds due 2030 were better by 0.55 point to 98.3 bid.

Meanwhile in Brussels, talks between Ukraine and the European Union were believed to be proceeding well, reports said.

Kiev has asked for a $4 billion loan to cover debts to Moscow in order to ensure gas supplies as well as replenishing reserve tanks.

The Ukrainian bonds due 2016 "had a good day" as accounts may have shuffled around at month's end, a buysider said.

The bonds were better by 2 points at 68 bid, 75 offered.

Also in Brussels, Turkey prime minister Recep Tayyip Erdogan attended meetings to discuss accession with the E.U. leadership.

Racial tensions and job competition between native populations and Turkish and Muslim immigrants have already placed political pressures on many E.U. member-states, which gave rise to a compromise proposal of a "privileged partnership," reports said.

The status would allow certain member rights to Turkey without extending full membership.

Erdogan asked his counterparts in France and Germany to support Turkey's bid for full membership.

In addition, Ankara's tensions with E.U. member Cypress, has also created further obstacles on the path to accession.

The Turkish government bonds due 2030 were seen unchanged at 152 bid.

Asia flat on slow open

Asia had little support from local equities but still slowly traded within recent ranges.

In the Philippines, the energy firm Philex Mining Corp. announced that it has struck a significant oil deposit off the coast of Vietnam.

The Vietnamese affiliate Pitkin Petrolem plc tested the field at a combined rate of 3,265 barrels per day plus 8.1 million standard cubic feet of gas per day, reports said.

The Philippine government bonds due 2030 were seen at 123½ bid.

In Indonesia, inflation of the rupiah will likely ease to 3.8% in June compared to June 2008, said central bank deputy governor Hartadi Sarwono, according to the Jakarta Post.

The slowing rate may allow for a rate cut during the bank's Friday meeting, the report said.

The rupiah was seen trading at 10,225 to the dollar.

The Indonesian bonds due 2019 were quoted at 127¾ bid.

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