Emerging markets trading firm; investors wait for new data; Mexico prices $1 billion

By Aaron Hochman-Zimmerman

New York, Sept. 25 - Emerging markets had a strong day as more progress was shown on the way to recovery, one week after the Federal Reserve Bank interest rate cut.

Trading levels were mixed in Europe. Turkey dropped off as its economy showed signs of weakening, but some feel that its performance presents an opportunity for a long-term play.

Kazakhstan was also showing promise as its liquidity and inflation troubles are beginning to ease.

Latin American issues were mostly up as they followed the day's big winner, Mexico's sovereign due 2034, which was retapped for $500 million along with an addition of the same size to the Mexican bonds due 2017.

The two Mexican add-ons kept the primary pipeline open for another day on the sovereign side, while Ghana and Hungary have their own issues on the calendar and rumors of a new deal are still following Turkey.

In the primary, corporates have only been able to produce local-currency deals, but investors are opening up to the idea that their turn may come sooner rather than later.

A continuation of that positive tone may hinge on further headlines and data scheduled for release this week.

"We're very well braced for negative news coming out of the United States," said Enrique Alvarez, a Latin America debt strategist at IDEAglobal, referring to second quarter final GDP and new home sales data to be released on Thursday.

Volatility made a steady path downward as the VIX index finished lower 0.77 to end the day's session at 18.60. The VIX index is widely regarded as the yardstick of market volatility.

Emerging markets once again held steady as an asset class, according to JP Morgan's EMBI+ index. The index which measures the amount of yield investors require to hold emerging markets was seen off 2 basis points from Monday's close at a spread of 195.

Europe showing stability, opportunity

In Russia, the announcement of a new cabinet should be taken positively by the market, according to a market source.

Some of the names at the top of the Russian government are changing, but it is unlikely that severe policy changes will follow, even ahead of Duma elections in December and presidential elections in March, the source said.

The ruble is strengthening and the economy continues to look strong, the source said.

The ruble closed up versus the dollar at 24.983.

Turkey's bonds also have growth potential, according to one source, noting that the economy is weakening a little bit under inflation pressures.

Many expect one or even multiple rate cuts from the Turkish central bank before the end of the year, which puts Turkish government bonds in a good light, a market source said.

Rumors of an eventual new issue from the government are still on investor's minds, but there is no serious indication of an impending deal.

Turkey's government bonds due 2030 were seen trading down at 155.06 bid, 155.31 offered.

Earlier this summer, banks in Kazakhstan began to worry about their supply of liquidity and the inflating value of the tenge.

The National Bank of Kazakhstan was able to both manage the liquidity crunch and stem inflation concerns over the tenge to the satisfaction of the banks and market watchers, a market source said.

"Local banks will most likely survive the crunch," the source said, adding that the "crunch" will feel more like a slowdown.

As oil prices continue to drive up above $80 per barrel, the energy-heavy Kazakh economy will be able to float on its sea of oil, the source said.

LatAm strong over economic doubts

Latin America posted a strong day as volatility eased off. Even an increased inflation estimate from Brazil and blustering from Ecuador's president Rafael Correa did not cause much commotion in emerging markets. Mexico was able to price $1 billion in add-ons, and its 6.75% notes lead the sovereign winners on the day's session.

Mexico continues to keep its interest rates stable at 7.25% in the face of worries that a slowdown in the U.S. economy will spill over.

A market source said he believes that the Mexican economy will grow less than expected this year, and that rising food and oil prices has put the central bank on inflation watch.

The Mexican 5.675% sovereigns due 2017 were seen trading at 99.55 bid, par offered.

The 6.75% notes due 2034 were traded up 0.50 to 108.65.

In Ecuador, president Rafael Correa has been publicly stating that his country has enough cash to pay its remaining debt by next year.

Enrique Alvarez called Correa's rhetoric "a game of words."

"He'll create intrigue, then go back and backtrack on his words," Alvarez said, but in general Ecuador pays interest on time, so Correa's recent comments have not caused much of a stir.

Ecuador's solvency is good news to one market source, but it was not a surprise, as a restructuring debt under the current environment is not a likely outcome, a market source said.

Even as the Ecuador's financial situation is turning towards the positive, Correa also has not ruled out strip mining in his country, the source added.

The benchmark 10% notes due 2030 finished the day at 91.35 bid, 92.00 offered.

Brazil had a positive day in trading, according to Alvarez.

Inflation estimates for next year grew slightly to 4.1% from 4.0%, but it was not enough to bother anyone, he said.

"It looked like a pretty firm day," he said.

Brazil's highly traded 11% government bonds due 2040 finished up 0.20 to 133.70 bid, 133.80 offered.

Asian turmoil yet to hit market

As mass protests have caused government troops to enforce curfews and prevent large gatherings in Myanmar, embattled president of Pakistan Pervez Musharraf won the right to remain chief of the army if he is not re-elected to the presidency, reports the BBC.

Despite the uproar, a trader specializing in corporates noted that the effects from the upheaval have not dragged down the market. In general the trader noted that many who deal in both emerging and the U.S. high yield market are opting to keep money in the United States, but that is a trend that is not directly related to the recent news in Asia, he said.

Without a good explanation for its rise, another trader saw South Korean computer chip maker MagnaChip Semiconductor's 8% notes due 2014 up 1.50 at 66.50 bid, 68.50 offered.

Primary sustains its newfound vigor

Monday's revival in the primary was not a fluke, at least on the sovereign side.

Corporates are still lagging, but there's hope according to one trader.

"If you bring in the right company, it's going to get done," he said, adding: "It'll take a little more attractive yield than it would have a while ago, but that's just common sense."

"People just aren't willing to take on the risk in EM when there's good yields right here in the good ol' U.S. of A.," he said.

Still there was enough interest in Mexico's reopening of two sovereigns to allow it to raise an additional $500 million on top of each issue.

Mexico (Baa1/BBB/BBB+) priced two $500 million add-ons, with one added to its 5 5/8% bonds due 2017 and one added to its 6¾% bonds due 2034.

The reoffer price for the 5 5/8% notes was 99.55. That issue is now $3.5 billion in size.

The add-on to the 6¾% notes sold at 108.25. The issue is now $4.3 billion.

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