Emerging markets rise with ECB injection; gains tempered by holiday volumes; private placement in Israel

By Aaron Hochman-Zimmerman

New York, Dec. 18 - Emerging markets found strength from the European Central Bank liquidity injection where it could not from the Federal Reserve Bank auction.

In trading, the Philippines' bond due 2030 were up 0.75 to lead the benchmark issues with the help of the $500 billion infusion from the ECB which was called "monstrous" by Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

But, he noted, "this just sizes up the real magnitude of this problem; it's just enormous."

Monday's Fed auction did not provide the same lift because of its method of infusion, he said.

"$20 billion is not chump change, but since they've gone through this anonymous route, there's less information available there," he said.

Along with the ECB action, Goldman Sachs surprised many market watchers with its report of $10.7 billion in net revenue for the fourth quarter, bringing the fiscal year total to $46 billion net revenue through the end of November.

The report from Goldman Sachs "boosted the U.S. equity side," Alvarez said.

Yet at the same time there was a security bid for 10-year U.S. Treasuries, he said.

"One does not jive with the other," he said.

Not all of the headlines were positive on Tuesday.

The U.S. Commerce Department reported a 16-year low in new home construction, even though the number beat the expectations of some.

New home construction fell 3.7% and 24% since November of 2006.

In a move aimed at helping repair the broken housing market, the Fed approved a proposal which would place four new standards upon lending practices.

All of the help for the equity market let volatility ease off as market conditions improved. The VIX index closed 1.88 lower at 22.64. The index is the accepted gauge of market volatility.

Emerging markets saw a touch of success in prices, but issues widened by 4 basis points to a spread of 233 bps, according to JP Morgan's EMBI+ index. The EMBI+ measures the amount of extra yield investors will demand to keep money in emerging markets debt.

Asia quietly stronger

"It was just really quiet today," a trader looking at Asian issues said.

Gains in the morning trailed off later into the afternoon, despite the influx of cash from the ECB and the positive earnings from Goldman Sachs.

The coordinated injections from the Fed and ECB were "merely addressing liquidity concerns," and "will have zero effect on the U.S. economy long-term," the trader said calling it "a near-term band-aid."

In the Philippines, finance secretary Margarito Teves announced a PHP 54.1 budget surplus for the month of November.

The government now has a PHP 12.6 billion surplus for the first 11 months of the year, as compared to the PHP 58.3 billion deficit left from 2006, reported the Manila Times.

The surplus comes as the government took in PHP 47 million from the sale of its 60% share of the Philippine National Oil Co.-Energy Development Corp.

The Filipino sovereign bonds due 2030 added 0.75 to trade at about 135.25 bid.

In Indonesia, the Business Competition Supervisory Commission (KPPU) announced it will continue to investigate price-fixing by eight telecommunications companies.

The KPPU said evidence it has collected may indicate that the eight companies have operated as a cartel by illegally fixing prices on text messaging, the Jakarta Post reported.

The eight companies implicated are: Bakrie Telecom, Indosat, Telekomunikasi Seluler (Telkomsel), Telkom, Excelcomindo Pratama (XL), Hutchinson CP Telecommunications, Mobile-8 Telecom and Smart Telecom.

The Indonesian sovereign bonds due 2017 lost 0.25 to trade at 103.75 bid.

In Pakistan, opposition leader and former prime minister Nawaz Sharif will not be allowed to participate in the Jan. 8 elections.

No explanation for his exclusion accompanied the decision from the election commission.

The Pakistani sovereign bonds due 2017 were quoted at 91.75 bid.

Also in Asia, the deputy director of the Office of China National Committee on Aging, Zhao Baohua said that the eventual demographic shift in China's population may damage its economic development.

China may have 400 million senior citizens by 2050. Economically, this group will be less productive than the successive generation and will need to be cared for by the smaller and younger demographic group.

Meanwhile, the World Bank now estimates that China's economy is approximately 40% smaller after it revised its method of calculating GDP.

The new equation, which determined the economy is worth $5.3 trillion, includes more emphasis on purchasing power parity and shows that China will not likely have the world's largest economy in 2012, according to a BBC report.

Because of the new findings, China is eligible for more aid from the World Bank to include more assistance for climate protection due to its status as an emerging market.

U.S. telecom places deal in Israel

The pipeline in the major markets has seemingly been abandoned for the year in favor of vacations and end-of-year bookkeeping.

Yet, in a place where Christmas has less impact on the local market, Israel's financial institutions will invest in Jackson, Miss.-based Xfone, Inc. which has arranged a $25.4 million private placement of unsecured bonds and warrants.

The bonds will be linked to the Israeli Consumer Price index. They will bear interest at 8% per year until they are listed for trade on the Tel Aviv Stock Exchange and at 8% per year after that.

The investors will also receive warrants for 956,020 shares, exercisable at $3.50 per share for four years.

Between this placement and the $8.06 million private placement of units that was previously reported, Xfone plans to raise a total of $33.5 million to finance its acquisition of NTS Communications, Inc.

Xfone is a holding company that provides international voice and data communications services with operations in the United Kingdom, the United States and Israel.

LatAm slightly positive on ECB move

"LatAm was very quiet ... low volume, low volatility," IDEAglobal's Alvarez said.

The low liquidity and volume kept the issues close to flat in the days leading up to Christmas and the end of the quarter.

U.S. prosecutors in Miami have accused a Venezuelan-American of accepting $2 million to illegally contribute $800,000 to the presidential campaign Argentina's Cristina Kirchner.

The governments of Argentina and Venezuela have denied the allegations.

Argentina's 8.28% discount bonds due 2033 were quoted unchanged on the session at 95.35 bid, 96 offered.

Venezuela's government bonds due 2027 led the high-betas with a modest gain of 0.5 to trade at approximately 100.55 bid, 100.75 offered.

Brazil's highly traded 11% notes due 2040 climbed 0.25 to trade at 113.1 bid, 113.3 offered.

The issues due 2037 were up slightly by 0.1 to trade at 112.65 bid, 113.05 offered.

South African election priced in

In South Africa, Jacob Zuma defeated president Thabo Mbeki to lead the governing African National Congress.

The victory puts the scandal-ridden Zuma in a strong position to assume the presidency in 2009.

"I don't think it's a big surprise to the market," a trader specializing in South Africa said, indicating that any effects are already priced in.

Zuma's win has less influence on South African issuers than the external economic picture, the trader said.

Even though Zuma "is viewed as kind of a Lula-person," the trader said, comparing him to Brazil's left-leaning president Luiz Inacio Lula da Silva, he is not expected to cause a great amount of volatility.

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