Emerging markets recoup early losses to end little changed; Turkey dips

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Sept. 4 -Secondary trading in emerging markets debt was seen as mostly flat and featureless Tuesday, market participants and observers said. While there was a rise in U.S. stocks - seen in recent weeks as a proxy for more risky asset classes, a category which also includes global equities, high yield bonds and emerging market debt - emerging investors hugged the sidelines, perhaps scared off by a privately issued report indicating slowing manufacturing growth in the U.S., or made wary ahead of Friday's release of U.S. payroll growth data, since the U.S. is the key export market for many emerging countries, such as Mexico.

That country's bonds were seen generally flat, as were issues from Brazil as well as such normally volatile paper as Argentina and Venezuela. Outside of the Latin American sphere, Turkey's bonds were seen a little easier, though yields remain well below their week-ago levels, and Philippine sovereign bonds were steady and CDS contract levels a little better.

U.S. stock markets shrugged off the report by Tempe, Ariz.-based institute for Supply Management, whose factory index fell to 52.9 last month from July's 53.8 reading, although any reading above 50 indicates that manufacturing activity is still expanding, albeit more slowly. Economists had generally expected a slowdown, in the wake of recent housing-sector turmoil and higher borrowing costs in other parts of the economy. While the Standard & Poor's 500 Index and the Nasdaq Composite Index each rose more than 1% on the day, the bellwether Dow Jones Industrial Average climbed 91.12 ( 0.7%) to 13,448.86. Ten-year Treasury note yields meantime rose more than 2 basis points to 4.55%.

There was little movement seen in the average spreads of EM bonds versus Treasuries, considered the key gauge of investor aversion to risk, or embrace of it. The widely followed EMBI+ index compiled by JP Morgan & Co., after having at one point widened out by 6 bps, was seen ending up essentially unchanged at 223 bps, in line with the lack of price movements in EM bonds.

'Flattish' LatAm market 'treading water'

"On Friday, we saw a little drive up in the prices, with a little spread-tightening," said Enrique Alvarez, head Latin American debt strategist for IDEAGlobal, an international financial research company, but "curiously," the same phenomenon was not seen in Tuesday's dealings, he said, despite the solid, if not necessarily spectacular rally in U.S. equities, which frequently pull EM bonds up - or down - along with them.

Latin American trading "has been kind of flattish," with bids creeping up in Brazilian debt, which he saw up maybe around 1/8 - which in this market made it an outperformer. "Everything else was pretty flat."

He chalked the lack of any major moves to several possible causes, including a lack of staffing at some desks, with players straggling back in after a long Labor Day Holiday weekend which saw U.S. financial markets sleepwalk through an abbreviated session on Friday and close entirely on Monday, as well as "not a lot of conviction" that things would necessarily get better going forward in the financial markets, which have recently been roiled by concerns over the extent of the credit crunch among U.S. mortgage lenders and other financial institutions.

Alvarez said that given the response of the equity markets on Friday and again Tuesday to some positive U.S. economic numbers - bullish government data on personal income and spending and economic activity as measured by the Chicago Purchasing Managers Index, both out Friday - and their positive reaction also to Friday's statements by president George Bush and Federal Reserve chairman Ben Bernanke indicating that Washington is well aware of the rising problems of mortgage payers and the companies issuing those mortgages and would do something about it, "you could have expected" EM to rise along with U.S. stocks, "showing a little more appetite for overall risk-taking - but that has not occurred."

Instead, he characterized Latin American dealings as "sort of ho-hum," saying the market was "treading water."

Among the major issues, Alzarez saw Brazil's benchmark 11% dollar-denominated global notes due 2040 - considered the most widely traded and liquid EM instrument - hanging in at 132.20 bid, 132.30 offered, for a 333 bps spread over Treasuries. He saw Venezuela's 9¼% dollar-denominated 2027 bonds at 100.25 bid, 100.5 offered, with a 437 bps spread, and Argentina's widely traded Discount bonds due 2033 at 85.5 bid, 86.5 offered, for a 480 bps spread. Mexico's 2031 bonds were essentially steady at 128.88 bid, 129.38 offered, at a spread of 120 bps over.

Apart from the dollar-denominated globals, Alvarez said that locally denominated bonds issued in such currencies as Mexico's peso and Brazil's real "in general have also been subjected to a lengthy retreat, but they've been coming back in the last few days."

He noted that some locally traded Argentine bonds have recently been "slightly better supported " over the last few sessions, saying that spreads have been "chipped away " to around the 660 bps level from 700 bps previously.

Turkey easier, though up week-on-week

Apart from Latin America, Turkey's bonds were seen easier, in line with an easier lira in the face of continued global market uncertainty.

Yields on the country's benchmark 2009 bond were seen having edged up to 18.12% from 18.06% on Monday. However, it should be noted that those yield levels were well below levels around 18.46% seen on the markets a week ago in the immediate aftermath of Abdullah Gul's election to the presidency by Parliament and expressions of concern by the military leadership and other secularists that the selection of the devoutly Muslim Gul to the largely symbolic but psychologically important post might threaten the traditional secular nature of the Turkish state.

Philippine bonds, CDS mostly steady

In Asian dealings earlier Tuesday, Philippine government bonds were seen steady to marginally higher, in line with firmer stock markets in the Far East, although traders were said to be somewhat cautious ahead of the upcoming U.S. data. Manila's sovereign 2031 bonds were being quoted at 107.125 bid, 107.375 offered, while its 2032 bonds came in at 96.25 bid, 96.5 offered.

The cost of hedging against a possible default via a credit default swaps contract was seen having tightened about 2 bps to the 175 bps level.

Primary stays quiet

In the primary market new deals were nowhere to be found, but investors brought their optimism back to the office after the U.S. Labor Day market holiday.

Before the Labor Day break, the conventional wisdom was to reserve judgment about the market until after the Federal Reserve Bank meeting on Sept. 18.

Tuesday, a spirited crowd of investors, seemingly well rested after taking time off, were cheerful about the market's chance for a fall rebound.

"If global equity markets can catch a bid over the rest of this week, I think we'll see some supply coming online even before the Fed moves," said an emerging markets analyst.

"The rest of this week will still probably be quiet, but I wouldn't be surprised to see a few issuers testing the waters early next week," the analyst added.

The $1.5 billion raised by India's ICICI Bank Ltd. to meet the local demand for credit is "a good sign of the availability of capital for the right borrowers," the analyst said.

The possibility of a recession in the United States was discussed in a speech by former U.S. Treasury secretary Lawrence Summers, but the suggestion did not make many investors overly anxious.

"On the U.S. recession, I think EM investors are still very skeptical that a sluggish U.S. economy would translate into significant EM weakness," the analyst said about the idea of a recession.

"Clearly an outright recession in the U.S. would hurt EM along with the rest of the world, but a lot of investors are thinking that simply sub-par U.S. growth would not derail the EM story," the analyst said about a recession's possible effects.

The hesitancy in the primary market will pass with the summer holiday season, another source said.

Fewer negative headlines, assistance from central banks and "acclimatization" to the market climate will come together to bring people back to the deal table, the source added.

Those who have suffered most under the credit crunch will show up albeit fashionably late to the impending rebound, but those who have weathered the storm will be able to take the lead bringing new issues into the fall season, the source said.

League table figures compiled by Prospect News showed last month to be a fairly typical August compared to years past in terms of new issuance values.

The source believes the typical cycle will continue with a hastening pace of new issues in the fall.

Another market source feels that the summer troubles are not over, but are certainly past their peak.

Investors should begin taking positions for a fall rebound, the source said.

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