Emerging markets open week lethargic; prices mixed and flat; ADB prices $1 billion

By Aaron Hochman-Zimmerman

New York, Jan. 14 - Emerging markets struggled to shake off the weekend as well as gloomy news seeping in from the major markets.

Last week, "we kind of outperformed on the way down," a trader said about emerging market credits when compared with equities.

This week we may "underperform on the way up," he said.

Many investors were also hesitant to make rash moves before the meeting of the Federal Open Market Committee on Jan. 30.

"Somehow it feels worse this time," he said about sentiment relating to the anticipated Fed action on interest rates.

Despite an equity rally, the tone in emerging markets kept trading volumes painfully low for many traders.

"It was a joke of a day," a trader said.

In the primary market, Philippines-based Asian Development Bank priced a $1 billion bond with spread of 51.75 basis points over Treasuries.

As equities showed a positive day, volatility dropped off by 0.78 to 22.90, according to the VIX index. The index is a standard measure of market volatility.

On Monday, both prices and Treasuries lacked direction. Emerging markets widened by only 2 bps to a spread of 257 bps, according to JP Morgan's EMBI+ index. The EMBI+ calculated the amount of extra yield investors demand to hold money in emerging market debt.

Emerging Europe opens week flat

Emerging Europe sluggishly began a week amid persistent macroeconomic pessimism.

Volumes were light and trading was flat as many investors looked to the hurting U.S. markets for better deals, a trader said.

"The U.S. is so cheap," the trader said.

In Turkey, Sertan Kargin, the chief economist at Turk Ekonomi Bankasi, said he expects the central bank to cut the overnight lending rate by 25 bps in January and 50 bps in February or March to 15%, reported the Turkish Daily News.

After the expected cuts the government will likely take time to reexamine the economy, but will probably reduce rates another 75 bps before 2009, Kargin said.

The Turkish bonds due 2030 were spotted up by 0.2 to trade at 157 bid, 157.25 offered.

Bank accounts belonging to Russia's government have been frozen by French courts, reports RIA Novosti.

A Swiss firm, Noga, has made claims against the Kremlin since 1993.

They currently charge that the Russians refuse to repay approximately $73 million.

Also, one of Russia's major oil producers Lukoil reported profits above $8 billion during 2007.

Lukoil also announced plans to increase hydrocarbon production by 5% to 7% in 2008, which is intended to make up for what executives called disappointing growth figures in 2007, the Itar-Tass News Agency reported.

The Russian sovereign bonds due 2030 were quoted up 0.1 at 114.95 bid, 115.125 offered.

In the Ukraine, millions have braved harsh winter temperatures to wait outside banks in order to claim compensation for savings lost during the collapse of the communist government.

Each person eligible is entitled to approximately $200.

Some experts believe that the influx of cash may exert upward pressure on inflation which already stands at 16%.

The hryvna was seen trading at 5.05 to the dollar.

The Ukrainian bonds due 2016 were seen trading at approximately 99 bid, 100 offered.

ADB prices $1 billion

While trading was at a standstill, triple-A rated Asian Development Bank, based in Manila, was busy finishing a $1 billion offer.

ADB priced a $1 billion three-year note at 99.894 with a coupon of 3% at a spread of 51.75 bps over Treasuries.

Morgan Stanley, Daiwa Securities and RBC Capital acted as bookrunners for the deal.

Elsewhere, Grupo M Holding SA (BB-/) has asked Merrill Lynch to act as bookrunner for its inaugural dollar-denominated offering.

A roadshow will be held in Hong Kong on Jan. 16, in Singapore on Jan. 17, in Switzerland on Jan. 18, in London on Jan. 21, in New York on Jan. 22 and Boston on Jan. 23.

Launch and pricing will be subject to market conditions.

Grupo M is a Santiago, Dominican Republic-based textile manufacturer.

Also, Punjab National Bank will offer Rs. 2.5 billion of tier I perpetual series III notes, with a Rs. 500 million greenshoe, in a private placement.

The issue is scheduled to open Jan. 16 and close on Jan. 17.

Punjab National Bank is a commercial bank based in New Delhi.

For the potential issuers which do not carry a triple-A rating the choices are to wait longer for the market to improve, or to strike now before it gets worse.

"I just think we've fallen to such levels that it will take a while before anyone wants to dip their toes back in the water," a trader said.

Still, "there are a lot of issuers trying to push deals through," an emerging markets strategist said, adding that almost $20 billion worth of new issuance was pulled last quarter.

"There's plenty of issuers on the sidelines," he said.

"It hasn't been entirely about investors not willing to buy," he said, but "issuers not willing to accept higher spreads."

One thing both sides must consider is that, at least for now "this is normal," he said, about the broader condition of the market.

"It might even get worse," he said, suggesting that some issuers may want to take what they can get while it lasts.

LatAm unmoved by equity climb

Prices in Latin America were not pulled up by rising equities, but rather generally held still in an emerging market environment cautious of headlines and subprime spillover from the developed world.

"It's going to be tough in this environment," a trader said, adding that investors will also be reluctant to trade in the days leading up to the Fed meeting.

Only the "best, most stable" credits will be able to trade in this environment, he said.

"There was absolutely nothing going on," a trader said, "I've reached the end of the internet."

Argentina's 8.28% discount bonds due 2033 were seen up by 0.25 to trade at 96.5 bid, 97 offered.

Venezuela's 9.25% sovereign bonds due 2027 were lower by just 0.1 at 103.65 bid, 104.4 offered.

In Mexico, the sovereigns due 2040, which priced on Jan. 8 at 99.93, were seen trading at 99.05 bid, 99.2 offered.

Brazil's president Luiz Inacio Lula da Silva traveled to Cuba to sign oil exploration accords and offer financial assistance to the communist nation.

It is unclear whether or not president Fidel Castro's health will allow him to meet with Lula who is described as a friend of the aging revolutionary.

Brazil's 11% government bonds due 2040 were quoted up by 0.15 at 135.15 bid, 135.25 offered.

In corporates, Usinas Siderurgicas de Minas Gerais SA was trading well, according to an emerging markets strategist.

The steel producer priced $400 million of 7.25% bonds at 99.127 last Friday.

The issues due in 2018 were spotted better by approximately 1.25 at 100.4 bid, 100.5 offered.

Quiet Asia flat to mixed

Asian trading was short of fireworks and big volumes on Monday.

"It was a very dull day," a trader said.

Most of the action came from sovereign cash trading which saw Indonesia firmer, and the Philippines under pressure, he said.

In the Philippines, the department of finance announced it may reduce the tax on petroleum products in February, according to the Manila Times.

Crossing the threshold of $81 per barrel prompted the discussion of price relief for Filipino consumers, and if oil crosses $103.25 per barrel, the tax will be removed entirely, the report said.

The Philippine bonds due 2030 were quoted higher by 0.125 at 130.5 bid.

Indonesia's House of Representatives may be forced to delay its planned tax holiday intended to encourage industrial growth.

The current bill before the House has no provisions for tax breaks, the Jakarta Post reported.

The government still has other options, including a plan to ease taxes by 25% for companies which are at least 40% publicly owned.

The Indonesian bonds due 2017 fell 1.25 to 100.75 bid.

Units of Pakistan's paramilitary forces have been dispatched to guard food supplies, as wheat in particular, is in danger of becoming scarce.

In the past food shortages have led to protests and civil unrest.

The Pakistani bonds due 2017 were almost unchanged on very light volumes at 83 bid.

Meanwhile, India's prime minister, Manmohan Singh and China's president Wen Jaibao signed an agreement to increase the level of trade between the two countries to $60 billion by 2010.

India's trade deficit with China is currently over $9 billion.

Trade between the quickly growing economies currently stands near $37 billion and grew by 56% in 2007.

The two also agreed to hold additional joint military exercises.

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