EM rides post-Fed celebration; optimism over primary; Venezuela strong

By Aaron Hochman-Zimmerman

New York, Sept. 18 - Emerging markets finally got the answer to its questions about what the Federal Reserve Bank will do about the credit crisis.

The Fed dropped its benchmark interest federal funds rate by 50 basis points, which leaves it at 4.75%. The cut is the first since 2003.

The 50 bps reduction came as a surprise to many with inflation concerns who were expecting a more modest 25 bps cut.

Even though the larger cut was good news to those who would like to see more liquidity, emerging markets will still need time to sort out its opinions over how effective the cut is.

"I don't have a good sense of how much real buying there was here," a buyside source said.

Issuers and investors have been procrastinating for months, putting off new deals and keeping trading volumes low as one deadline after another passed by.

"They will be much more discerning," said a trader who specializes in emerging Europe about how investors are likely to behave in a post Fed-cut market.

"They have a good idea of what they want to be doing," the trader said, but investors are cautious about acting so closely on the heels of a market-changing event.

After the Fed cut, a furor broke as stocks went soaring and volatility plummeted. The accepted measure of market volatility, the VIX index closed down 6.13 to end at 20.35 points.

Overall, the cuts also gave a big bump to emerging markets on the day. JP Morgan's EMBI+ index was seen down 11 bps at 223 bps. The EMBI+ measures how much yield investors required to accept the risks of emerging markets.

The Fed provided the big news, but market watchers were also interested in bank profits. Lehman Brothers Holdings Inc., the first bank to report third quarter numbers, suffered a 3% drop off over the quarter as compared to the same period last year. Despite the drop, the fourth-largest bank in the United States was able to overcome some of the challenges related to the subprime crisis and improve upon some people's predictions of its performance.

Latin America riding high

Venezuela's 9¼% sovereigns due 2027 led the way in gains as they traded around 102.25 late Tuesday, up from 100.95 on Monday. Venezuela's sovereign bonds tightened 36 bps as measured by their component of the EMBI+ index, while Ecuador's government issues narrowed 38 bps.

Argentina's high-beta 8.28% notes due 2033 were seen trading around 91.20, better from the close Monday at 88.10.

The nation's bonds tightened 45 bps on the EMBI+ index.

Before Tuesday, provincial bonds in Argentina had been conspicuously falling, up to 20 points in some cases. That negative sentiment has taken the country's sovereign debt down with them, a market source said.

Election year spending on infrastructure and underreported inflation have hurt local offerings such as the bonds from the Province of Buenos Aires.

The provincial issues have seen losses, but local government has kept its fundamentals in good shape and the undervalued bonds should perform very well, the source said.

Unlike the controversial national government, the government in the Province of Buenos Aires has been widely praised for its fiscal responsibility, the source noted.

The provincial bonds are a "very good value," he said, adding they are "the heart" of Argentina's economy and "the soul" of its sovereigns."

The outlook for the issues is "stellar," the source added.

Elsewhere in Latin American trading Tuesday, Mexico's sovereigns due 2017 stayed flat at 100.75 bid, 100.95 offered.

In Brazil, inflation trouble seems to be more advanced than many had hoped, according to a market source.

The source expects a 125 bps reduction in that country's overnight interest rate from the central bank by the end of the year, but the bank will likely have to suspend any further cuts or even raise rates to deal with oncoming inflation.

The star Brazilian 11% notes due 2040 were seen trading at 133.95 bid, 134.00 offered Tuesday, up from Monday's close at 132.85 bid, 132.90 offered.

Emerging Europe tighter

In emerging European trading Tuesday, "we seem to be tightening back in today," a trader said about the European markets, adding that sovereign yields generally dropped around 5 bps or 6 bps.

The European markets were closed before the 2:15 p.m. ET rate cut announcement.

Turkey began the morning slightly off, but recovered before the market close.

The Turkish government notes due 2016 ended flattish at 102.25 bid, 103.00 offered.

The bonds evened out as the Turkish Daily News reported that Ergun Özen, Garanti Bank's president and chief executive officer said that the Turkish economy may suffer a mild slowdown. Rather than a severe economic trauma, the annual growth may slow to 4.5% to 5%, which would dampen the effects of the worldwide credit crunch.

Asian corporates looking strong

Even before the easing of the benchmark U.S. interest rate, investors were looking towards Asia and seeing corporates which have taken steps to deflect the impact of the U.S. subprime crisis.

China's Titan Petrochemicals Group Ltd. and its 8.25% bonds due in 2012 are highly attractive, according to a market source.

Titan has been able to avoid poor investments, while wisely selling assets, the source said.

The source considers the company's B2 rating is in some ways undeserved and believes the bond's value is poised to increase.

South African bonds head north

South Africa's R153 sovereign was seen trading around 9.235% Tuesday, slightly weaker than its close of 9.225% Monday.

The long-term R157 notes were just slightly lower at 8.570% from a close of 8.555% Monday.

The rand was bid around 7.074, stronger from its overnight close of 7.198.

Sovereigns showed some mild improvement the on day of the anticipated Fed rate reduction, but in South African corporates "it's going to be viewed quite positively," said an analyst who specializes in South Africa.

"A lot of them are really very good companies," the analyst said.

Peermont Global, Consol Glass and Edcon are some of the more liquid corporates, the analyst added.

Any company which tapped the euro high yield market is likely an attractive investment, he said.

'Potential' primary revival

In the primary market, the day new issues have been waiting for arrived Tuesday. Many investors waited fruitlessly until after Labor Day in the United States for the flow of new issues to return. After another two weeks, investors are still cautious to see who will bring the first new issue out of the gate.

When asked if the Fed's actions will restart the pipeline, an emerging markets analyst said: "Potentially ... I think it will.

"There are a few pretty good deals in the pipeline that are not highly levered."

The Republic of Ghana turned heads with Monday's announcement of its benchmark-sized debut sovereign.

Citigroup and UBS will handle the books for the deal which will be on the road in the United States and Europe from Sept. 19 to Sept. 26.

"Certainly that's good news," the analyst said about Ghana.

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