Emerging markets prices ride higher with equities; Argentina leads high-betas; primary halted

By Aaron Hochman-Zimmerman

New York, Oct. 26 - Emerging markets finished the week strong as the dollar and financial institutions Countrywide Financial Corp. and Merrill Lynch & Co. crumbled around it.

Trading levels tightened as the dollar fell and the U.S. equity market rose, propelled by the technology sector, according to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Not at all," a syndicate official said about Countrywide's effect on emerging markets.

"I don't get it myself," he said about the way emerging markets has survived the lingering credit crunch in recent days.

"I expected some time ago a setback due to the very bad numbers."

Nevertheless, Argentina was again at the front of the high-beta charge. Investors, eager to put the presidential elections in the past, watched the discount notes due 2033 skyrocket between 1.75 and 2 points.

Despite the success, the syndicate official feels that new issuance and trading volumes will be light until after the dust settles from the upcoming Federal Reserve Bank meeting.

The primary may already be showing the predicted slowdown. Not a whisper was heard as investors looked ahead to the Fed meeting Wednesday, when a 25 basis point rate easing is expected by many market watchers.

Even though emerging markets were up, and after seeing up strong inflows for the last four weeks, mutual funds lost $91 million from the sector during the week ending Wednesday, according to EPFR Global.

"Investors again reassessed the riskier assets in their portfolios," EPFR Global said in a press release.

Volatility stayed below Thursday's closing level of 21.17 and dropped 1.61 by the end of the day to close at 19.56, according to the VIX index. The index is the standard gauge of market volatility.

As a sector, emerging markets showed its strength on the day in JP Morgan's EMBI+ index. The EMBI+ was spotted trading 4 bps tighter with a spread of 202 bps. The index determines the average amount of extra yield investors will demand to keep money in emerging market's debt.

Europe strong despite headlines

Emerging Europe traded well, although what saved the sector from Countrywide's headlines and a swelling credit crisis in developed Europe is a bit of a mystery to some investors.

The light volumes being seen are likely a consequence of anticipation of a Fed cut next Wednesday, a syndicate official said. Even after the meeting and a probable rate reduction of 25 bps, investors may take their time before committing large amounts of money to the market, he said.

In Turkey, talks between Turkish and Iraqi officials were ineffective as the Turkish air force

conducted strikes against Kurdish rebels, likely within Turkish airspace.

Turkey described Iraqi proposals to hand over members of the Kurdistan Workers Party (PKK) as

too time consuming, and added that Turkey expects urgent and determined measures to be taken.

Still Turkey's sovereigns remain aloof of the rising conflict.

The Turkish benchmark bond due 2030 was quoted higher by approximately 0.60, trading at

158.00 bid, 158.50 offered.

In Russia, president Vladimir Putin met with leaders of the European Union in Mafra, Portugal, to work through differences over world affairs, energy and trade.

Among other things, the E.U. would like to establish an early warning system with Russia, one of the region's largest oil suppliers, to deal with energy shortages before they become critical.

At the meetings Putin sharpened his rhetoric against a planned U.S. missile shield in eastern Europe.

In his comments to the media, the Russian president likened the current impasse with the west to the 1962 Cuban missile crisis.

The Russian sovereign due 2030 was seen approximately unchanged at 113 bid, 113.25 offered.

LatAm rides commodity prices skyward

Latin America was up in trading Friday, but by how much was determined by each issue's status as a high-beta credit.

The more volatile credits ran out in front as the dollar fell and commodity prices such as gold and oil hit historic numbers, Alvarez said.

On the last day of trading before Argentina's presidential election Sunday, there was "some relief that you're finally going to get the election concern out of the way," he said.

As current first lady and senator Cristina Fernandez de Kirchner praised her husband's economic policies, she seems poised to defeat her nearest challenger Elisa Carrio.

Meanwhile the country's 8.28% sovereigns due 2033 moved up 1.75 to 2 to trade at 97.75 bid, 98.90 offered with a spread about 25 bps tighter.

Venezuela saw a 1.25 lift in its high-beta credit, which was quoted at 108.5 bid, 109 offered. The spread tightened in by about 15 bps.

"Crude hit $92 per barrel," Alvarez offered as the simple explanation for Venezuela's success.

Brazil has seen its sovereign issues remain a little more stable than some of its neighbors', and therefore did not enjoy the same payday on Friday.

Brazil is "treading water essentially," Alvarez said with "a little updrift."

The government bonds due 2034 were quoted at 128.75, while the sovereigns due 2037 were seen up 0.25 to trade at 115 bid, 115.3 offered.

Asia up with equities

Asia was "pretty solid," according to a trader, who said prices were strong on light volumes.

"It's still not decoupled a lot from equities," he said.

"People are trading the stock market, so to speak," he said. As equities went up so did Asian credit.

The benchmark Philippine government bonds due 2030 gained approximately 0.35 to trade around 134.125 bid, 134.5 offered.

In very light trading, the Indonesia government bond due 2017 took on 0.25 after having held almost static for three days. The issue was quoted at 105.75 bid, 106.15 offered.

In Pakistan, government troops and helicopter gunships reportedly attacked the stronghold of a pro-Taliban militant, Maulana Fazlullah.

Fazlullah has recently been making public appearances to encourage his followers to target the army.

The Pakistani sovereign was better by 0.5 as it traded around 91 bid, 92.5 offered.

"The market did rebound pretty nicely towards the afternoon," the trader said, but many investors are holding off until the Fed meeting.

Like many issues, neither the Indonesian or Pakistani bonds saw very large volumes, but that will change once the Fed announces its decision, he said.

Primary quiet to end big week

After two days of pricing deals in the billions, there was little energy left in the primary market on Friday.

The action from the week included a 6.609% $1.2 billion tranche from Russia's JSC VTB Bank, which was the biggest ever international market eurobond issuance by a Russian non-sovereign borrower, according to a VTB Bank press release.

Yet after the high volume, the calendar for the week of Oct. 29 is still showing a number of deals scheduled, including a benchmark-sized 10-year dollar offering from the Development Bank of Kazakhstan and $100 million three-year bonds from Banco Mercantil do Brasil SA, which has already been talked at 8¾% to 9%.

"The new issues are going well," a syndicate source said about the primary in general, although he admitted that as the Fed meeting approaches investors are likely to head for the sidelines to see what the Fed has in store.

Regarding sovereigns "I think things are going to stay on the light side," IDEAglobal's Alvarez said about the primary after the Fed meeting, but corporate issues are likely to pick up, he added.

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