Latin America weaker; Asia holds strength; Ghana plans benchmark-sized debut

By Aaron Hochman-Zimmerman

New York, Sept. 17 - On a day when emerging markets was consumed with speculation over the Federal Reserve Bank meeting on Tuesday, investors went running from risk over concerns that a rate reduction from the Fed will be more conservative than many had previously been hoping for.

Some have made more radical predictions that the Fed will ease rates by up to 100 basis points, but the consensus amongst market watchers is that the cut will be either 25 bps or 50 bps.

While the pessimistic investor would say that a severe cut would just be evidence of a larger and growing credit problem, the optimists who make up the larger camp are eager to see more liquidity in emerging markets.

"The Fed can have a big impact if it's aggressive," an emerging markets analyst said.

"If it cuts by 50 bps or by 25 bps, but with a very clear statement that it is leaning towards one or more additional cuts, the Fed could give EM a nice shot in the arm," the analyst said.

If the rate cut is too small, or the accompanying statement is not sufficient to reassure investors that the Fed is willing to make significant cuts if action is needed, "we'll have a lot of rumbling again," a strategist said.

Even as the Fed looks like it will cut rates, volatility was still on the rise. The VIX index, which measures market volatility, ended up 1.56 Monday to finish the session at 26.48.

But despite the worries, JP Morgan's EMBI+ index edged firmer. The index, which measures how much yield investors require to hold emerging markets debt, was seen 1 point higher at 417.78 with a spread of 222 bps, 1 bp lower than Friday's close.

Looking months down the line, a market source forecast sovereign spreads will end the year tighter than current levels.

The source did admit that recently released data makes that prediction more improbable, but feels that more bad news is required to widen spreads over the long term.

Volatility will be on the rise if the Fed only offers a 25 bps reduction to investors, the source said.

However, the source still believes that central banks worldwide will do what is necessary to add sufficient liquidity to the market.

Another, less optimistic, source feels that investment and consumption figures in the United States will suffer a significant slowdown as the year closes.

Housing and unemployment figures will drive credit tighter "to an even greater extent," the source said.

LatAm off before Fed

In trading Monday, Latin American debt followed stocks downward in the morning and then proceeded into a holding pattern for the rest of Monday's session.

The poor performance came from fallout from the Bank of England's bailout of lender Northern Rock and the unwillingness on the part of investors to accept big risks the day before the Fed meeting.

However, "it's really not noteworthy," said Enrique Alvarez, a Latin American debt strategist for IdeaGlobal, about the day's losses.

In Latin debt the day "began a little slow," Alvarez said about trading Monday.

"Buys were to the downside," he added, but said that investors should not read anything from the day's events about the condition of the market for the long-term.

The Fed meeting is what is causing the slowdown, "there's no long-term impact," he said.

Venezuela had the most difficult day of the high-beta Latin American sovereigns. The country's 9.25% notes due 2027 were seen trading at 100.00 bid, 100.95 offered down from Friday's close at 101.00 bid, 101.05 offered.

Argentina's 8.28% bonds due 2033 were seen trading at 87.75 bid, 88.10 offered, off about 0.25 from the end of the day Friday.

Mexico's sovereign notes due 2017 were bid at 100.75, offered at 100.90, down just 0.05 from Friday.

The Mexican peso gained 0.02 as the dollar suffered. At the close, the dollar bought 11.142 pesos.

Brazil's highly-traded 11% sovereigns due 2040 were trading at 132.85 bid, 132.90 offered. The notes were off 0.15 from Friday.

The real closed up versus the dollar by 0.02 to finish at 1.922.

When asked what other news may have affected the market a syndicate desk official repeated: "Nothing, nothing, nothing."

As investors watch and wait for the rate cuts, "no news is good news," said the syndicate official.

Asia weathering the storm

Investors have been scouring Asia for attractive issues which have remained liquid and at a relatively safe distance from the credit crisis which has most recently manifested itself around the United Kingdom's Northern Rock.

Indonesia's PT Berau Coal (//B+) and PT Adaro Indonesia are performing well as the Asian coal sector is favored, a market source said.

IPOs are expected from both companies in the near future.

Thai telecom True Move Co. Ltd. (B1) is offered at a z-spread of approximately 500 bps.

The market source feels that is a fair value, especially when compared to the rest of the Asian telecom sector.

From this point forward, True Move's spreads will tighten, the source said.

Asian banks have outperformed other banking sectors.

Asian banks have been attempting to decouple themselves from U.S. linked interests, the market source said.

If vulnerabilities do exist in Asia, they are in Chinese property development companies, the market source said.

Ghana breaks primary's silence

In the primary market, when most thought issuers were unashamedly sitting on their hands, the Republic of Ghana (B+) announced its debut benchmark-sized sovereign offering.

The Republic of Ghana has asked Citigroup and UBS to handle the books for its debut benchmark-sized eurobond issue.

A roadshow will be held in the United States and Europe beginning on Wednesday.

Despite the solitary new issue, the primary market is not in the shape market watchers would like.

"I think we're still very far away from seeing new issuance recover, especially issuance from the weaker credits," said an emerging markets analyst, who added: "an aggressive Fed accommodation could help drive spreads tighter and restore some liquidity to the secondary market."

The secondary market may be able to help the primary back on its feet, the analyst said.

"If we can see some secondary market liquidity for a few weeks, then the primary market won't be far behind, although again it will be very tough for the weaker issuers to tap the primary market at all through year end," the analyst said.

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