Emerging markets slide; Emerging Europe tightens; Czech Republic prices €2 billion

By Aaron Hochman-Zimmerman

New York, June 3 - Emerging markets were generally weaker with some bright spots during Tuesday's session.

Asian and Latin American trading widened with "concerns over the investment banks," a trader said, which in the past "have been pretty well-founded."

Awake a bit earlier was emerging Europe, which narrowed, even if just slightly.

Tuesday was "a little more busy than last week," a trader of emerging European credit said, adding the positive tone gave investors hope that "next month probably will be a little bit tighter."

For the rest of the week, the market can anticipate "quite a lot of hanging around waiting for payrolls," a market source said about the non-farm payroll figures expected this Friday.

The Czech Republic was not in the mood for hanging around as it quickly priced its debut €2 billion 10-year deal.

Meanwhile, on the Western side of the Atlantic "there was generally a weaker tone in the U.S. market," a syndicate official said.

"There was a lot of noise on Lehman [Brothers]," he said, hoping the bank, which is rumored to be in the market to raise $4 billion, "would not be the next shoe to drop."

A down day for equities bounced volatility over 20.00 as it gained 0.41 to close at 20.24, according to the VIX index. The index is a commonly used gauge of market volatility.

With another strong day for Treasuries, emerging markets widened by 10 basis points to a spread of 259 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

Emerging Europe rebounds

Emerging Europe traded tighter on slightly higher volumes than during last week, which was shortened by bank holidays in the United Kingdom and the United States.

After Monday's downgrades in the financial sector, "the market sold off basically," a trader said, but Tuesday "we are more or less at the same levels we were before."

In Turkey, former foreign minister of Slovakia Eduard Kukan urged Turks to be "patient" and "persistent on the path toward full membership to the European Union," according to the Turkish Daily News.

"I don't know if being patient is an option. You might have to be patient for 20 to 25 years. One should be persistent in continuing the dialogue and trying to put up arguments that would be convincing to both sides," Kukan said in the report.

Kukan said Turkey would contribute to the alliance and rejected the idea that Turkish membership is dangerous because it gives the E.U. a common border with the turbulent Middle East.

The Turkish five-year CDS tightened by 2 bps to 255 bps bid, 252 bps offered.

The Turkish sovereigns due 2030 fell 0.25 point to 151.125 bid, 151.25 offered.

One exception to the day's tightening was South Africa, the trader said, as the five-year CDS widened to 165 bps bid, 162 bps offered.

South Africa has struggled with energy shortages and more recent violence, the trader said.

On Tuesday, the Times of South Africa reported commercial building cost inflation rose to 14.6% year on year during the first quarter from 9.9% year on year in the fourth quarter of last year.

The rand was seen trading at 7.752 to the dollar.

Czech Republic prices €2 billion

The Czech Republic (A1/A/A+) priced its debut €2 billion 10-year eurobond at 99.738 with a coupon of 5% to yield a spread of mid-swaps plus 25 basis points.

Barclays and Deutsche Bank acted as bookrunners for the deal.

The bonds represent the debut issue for the Czech Republic.

"I don't think we've seen much trading," a syndicate official said as the deal priced late in the day in Europe.

Higher volumes in CIS

"Ukraine is trading very heavy," he said, ahead of an expected new issue.

However, no new information was released about what is thought to be a 10-year bond or a retap of the 6¾% bonds due 2017, he said.

The Ukrainian bonds due 2016 were quoted at 96.25 bid, 96.75 offered.

In Russia, president Dmitry Medvedev pushed for reforms in both environmental policy and press freedoms.

"It is necessary to revise the system of environmental responsibility. It may be more rigorous at some points. If, on the contrary, we believe that norms of responsibility are detached from the life, they should be adjusted," he said at an environmental and energy efficiency conference on Tuesday.

Also, in a letter to parliament he asked legislators to reject a bill that would allow authorities to shut media outlets based on wider definitions of defamation.

If passed, the law would include punishment for those who distributed information harmful to "individual dignity and honor," the BBC reported.

Many were critical of former president Vladimir Putin's policy toward the press.

Still, the New York Times reported that some political dissenters and critics have recently been digitally removed from television programs in syndication, mostly for criticizing then-president Vladimir Putin.

In corporates, government-run OAO Gazprom offered to buy the rights to the natural gas in Azerbaijan at market value, according to a Gazprom press release.

"Being a prominent hydrocarbon producer in the CIS [Commonwealth of Independent States] countries, Azerbaijan is Russia's objective partner as we have common interests. We are already linked by a developed gas transportation infrastructure. We are interested in developing the mutually beneficial cooperation between Gazprom and Azerbaijan in the energy sector," said Gazprom chairman Alexey Miller.

Meanwhile, Georgia president Mikhail Saakashvili decided to attend an unofficial meeting of CIS leaders in Petersburg beginning on Tuesday, the Itar-Tass News Agency reported.

"I think that the meeting of the presidents should take place, and if it takes place this will benefit the bilateral relations and tackling a quite difficult situation that emerged in the relations between Russia and Georgia," said Russian ambassador to Georgia, Vyacheslav Kovalenko.

Saakashvili's decision to attend the meeting came after Georgian foreign minister Eka Tkeshelashvili issued new demands that Russia withdraw its railway troops from the Abkhazia region.

"Certainly, we demand Moscow withdraw its railway troops from the Abkhazian region that it deployed on May 31. We also demand Russia pull out its military units, which were illegally deployed in this area under the cover of CIS peacekeeping forces," Tkeshelashvili said, according to Itar-Tass.

Moscow has claimed that the engineers were sent to improve infrastructure in order to provide humanitarian aid to Abkhazia, but Tbilisi believes the improvements are intended to allow for further Russian intervention in Georgia.

The Russian five-year CDS was seen 2 bps tighter at 89 bps bid, 87 bps offered.

The Russian sovereigns due 2030 slipped 0.2 point to 113.3 bid, 113.875 offered.

LatAm weaker with equities

Latin America slid on a weaker tone in the United States, which came on sour news from Lehman Brothers, a syndicate official said.

In Venezuela, president Hugo Chavez proposed a new law that required Venezuelans to cooperate with secret police and government officials or face up to four years in prison.

The law, which also would deregulate procedures for search and seizure, has drawn criticism from civil liberties advocates.

The benchmark 9¼% government bonds due 2027 dropped 0.4 point to 93.85 bid.

Meanwhile, Chavez's ally, Bolivia president Evo Morales, ordered the nationalization of Bolivia's Transredes SA, a gas pipeline firm.

Morales earlier warned the company to sell 25% of its stock to the government, but no deal could be reached.

"[Transredes] wanted to be bosses and have us be the employees. We're a small country - sometimes they call us underdeveloped - but we have lots of dignity. Partners are welcome, but we will not accept bosses," Morales said, according to the BBC.

Elsewhere, Brazil's 7 1/8% bonds due 2037 were quoted at 118 bid.

Farmers allow beef trade

In Argentina, protesting farmers decided to allow domestic beef sales to avoid a shortage, however, blockades of wheat will continue.

The farmers and the government are still at odds over the central issue of whether or not farmers can reasonably afford higher taxes on exports.

The general population is becoming more frustrated with the inability of either side to compromise, but neither side has won an overwhelming sympathy, reports said.

The 8.28% Argentine discount bonds due 2033 managed to add 0.2 point to 81.7 bid.

Asia 'pretty orderly'

In the face of weakness from equities in the United States, Asian markets were "behaving pretty well" on Tuesday, a trader said.

"We've widened out, but ... it's been pretty orderly in the widening," he said, adding: "We're a fair ways off the lows."

The rest of the week looks to be quiet as investors square off positions ahead of non-farm payrolls on Friday, he said.

Also, with the recent disappointing headlines from the financial sector, "the market is looking for direction from the U.S. economy," he said.

In the broad sense, Asia continues to be plagued by high inflation and commodity prices, a market source said.

In the Philippines, the central bank is expected to raise interest rates before inflation peaks in the third quarter, said think tank Global Source, according to the Manila Times.

Global Source expects a 25 bps hike between August and October, the report said.

The group projected that the peso may inflate to PHP 49 per dollar, but if growth figures reach 3.5%, the government will not assume more debt than it will be able to repay.

The Philippine government bonds due 2030 were better by 0.5 point to 130 bid, 130.5 offered.

In Indonesia, exports fell to $11 billion in April from $11.9 billion in March, the Jakarta Post reported.

Oil and gas exports were knocked down by 10.1%, while non-oil and gas exports dropped by 7% from March to April.

The Indonesian sovereigns due 2017 improved by 0.5 point to 100 bid, 100.5 offered.

Also in Asia, officials in Pakistan are investigating the bombing outside the Danish embassy in Islamabad which killed at least six on Monday.

The Pakistani bonds due 2017 were lower by 2 points to 75 bid, 77 offered.

The trader blamed both inflation and political uncertainty, which after all are "closely intertwined," he said.

The rupee was seen trading at 67.01 to the dollar.

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