Emerging markets improve; Argentina bounces back; KT Corp. prices $160 million

By Aaron Hochman-Zimmerman

New York, April 1 - Emerging markets improved in prices, spreads and sentiment on Tuesday as the external tide rose to the tune of a 391-point gain by the Dow Jones Industrial Average.

"This is not EM related," an emerging markets strategist said. "It's a result of the events in the U.S. equity markets."

The recent steps by the Federal Reserve to improve the market's liquidity situation have proved mildly successful in the near term, a market source said.

However, further policy changes are necessary to prevent the crisis from regaining its downward momentum, the source added.

Meanwhile, in the secondary market, Argentina, which had been posting new lows for 2008 as a farmers strike gripped the country, finally showed some progress toward recovery by adding 1 point to its discount bonds due 2033.

In the primary, South Korea's KT Corp. priced $160 million over two tranches, making Tuesday the second day in a row the primary saw a dollar-denominated deal price.

On the corporate side, a source noted that during March credits in Asia and Latin America were pushed wider than those in emerging Europe, in the United States high-yield market or among sovereign issuers.

Latin American spreads were stretched by 24 basis points to 645 bps.

Asian spreads were wider by 27 bps to 658 bps.

Emerging European spreads were wider by 15 bps to 733 bps.

U.S. high-yield spreads were wider by only 1 bp to 794 bps, while sovereign spreads were wider by 13 bps to 318 bps.

Volatility sank fast as equities put up rally numbers. The VIX index shed 2.93 to end at 22.68. The index is a frequently used gauge of market volatility.

Stocks also pushed Treasuries aside, which allowed emerging markets to tighten 15 bps to a spread of 293 bps, according to the EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to keep assets in emerging markets debt.

Emerging Europe improves with equities

Emerging Europe traded better with an improved tone as U.S. equities took in stride more writedowns from major European banks UBS and Deutsche Bank.

In Russia, the GDP is expected to grow by 7.1% this year, deputy prime minister and finance minister Alexei Kudrin told the Itar-Tass News Agency.

"The government's job should be to provide insurance against risks that exist in the market of investments, and to maintain sufficient liquidity," Kudrin said at the conference for the modernization of the economy and globalization.

However, "replacing market instruments with state control may eventually bring back the practices of rigid Soviet-era planning," he said.

"Over the past eight years we managed to derive lessons from the world crisis and the crisis in the United States," he added.

The Russian sovereigns due 2030 were spotted at 115 bid, 115.25 offered.

Meanwhile in Ukraine, president George Bush reiterated his support for Ukrainian membership in NATO.

Bush also spoke with prime minister Yulia Timoshenko about possible plans for the Ukraine to import gas directly from Uzbekistan, Kazakhstan and Turkmenistan independently of Russia.

Bush then visited Romania, where he campaigned for support among the NATO nations to extend membership opportunities to both Ukraine and Georgia.

Government prepares defenses in Turkey

In Turkey, after all 11 judges of the constitutional court accepted the case against the ruling AK Party, the government is preparing its case to remain in power and in existence, according to the Turkish Daily News.

The March 14 filing by chief prosecutor Abdurrahman Yalcinkaya would bar president Abdullah Gul, prime minister Tayyip Erdogan and 69 other party members from politics for five years.

The European Union has also expressed its disapproval of the lawsuit, which it believes undercuts democracy by placing the control of the government in the hands of the courts.

Still, Yalcinkaya believes the ruling party has acted undemocratically.

"All actions and rhetoric of the party is aimed at establishing an Islamic society in which Islamic rules and values have priority ... and then carrying out legal arrangements to move toward Shariah," he said in the indictment.

The Turkish government bonds due 2030 were quoted at 148.5 bid, 149.5 offered.

LatAm tighter, prices stronger

Latin America traded better in both prices and spreads as volume picked up on the back of a strong day in U.S. equities, a strategist said.

In Colombia, the government criticized Ecuador after an Ecuadorian military Gazelle helicopter was intercepted in Colombian airspace by two Colombian Black Hawk helicopters, the BBC reported.

The tension comes after Colombia was condemned by both Ecuador and Venezuela for a cross-border raid that killed a member of the FARC in Ecuador on March 1.

The Colombian government bonds due 2017 were spotted at 110.75 bid, 111.25 offered.

"Colombia is outperforming," the strategist said, adding that Peru's credits also performed well.

"People want to own credits they feel are solid," he said about credits such as Colombia.

In corporates, low liquidity has left Latin America to underperform compared to the wider market picture, a market source said.

Spreads are wider than similar credits across the sectors, the source said.

Farmer strike near end?

In Argentina, roads were still blockaded and food was often scarce despite speeches from president Cristina Kirchner and economy minister Martin Lousteau aimed at "preserving the profitability" of independent farmers, the Buenos Aires Herald reported.

The government also restated its support for the export taxes that sparked the strikes and unrest, the report said.

Although the strike is expected to continue, the government has shown some signs it is "able to deal a little bit better with the crisis down there," the strategist said.

"So people can come in and start covering shorts," he added.

The 8.28% Argentine discount bonds due 2033 added 1 point to 83 bid, 83.5 offered.

KT Corp. prices $160 million

For the second straight day, the primary market churned out a dollar-denominated deal.

Tuesday's momentum driver was KT Corp., which priced $160 million of notes in two tranches via Woori Investments.

The three-year notes worth $50 million priced at par with a coupon of Libor plus 150 bps.

The five-year notes worth $110 million priced at par with a coupon of Libor plus 160 bps.

KT Corp. is a Seongnam, Korea-based telecommunications provider.

Elsewhere in Asia, Singapore's CapitaMall Trust Management Ltd. priced S$155 million two-year notes with a coupon of 3¼%.

DBS Bank acted as the bookrunner for the deal.

The notes come from a S$1 billion medium-term note program.

Proceeds will be used to finance asset enhancement works and for general working capital.

CapitaMall is a Singapore-based asset management firm.

Asia tightens

Asian trading strengthened as spreads tightened across all of the sectors in emerging markets.

Meanwhile, the World Bank released a GDP growth forecast for Asia that generally downgraded the outlook over the next two years but remained optimistic in the long term.

"Growth in developing East Asia will decline by around one to two percentage points to around 8.5% in 2008 as a result of the unfolding financial turmoil in the U.S. and the resulting global slowdown," says the World Bank's latest review of the East Asia and Pacific region's economies, the Bank said in a press release.

"But despite the likely drop from recent double-digit levels, overall growth remains healthy across the region and most countries are well-positioned to navigate the global slowdown because of the investments they've made in the last 10 years in structural reforms and putting sound macroeconomic policies in place," the release said.

In the Philippines, the World Bank growth forecast was cut to 5.9% from 6.1% in November due to the global economic crisis and higher commodity prices, the Manila Times reported.

Growth is expected at 6.1% for 2009, the World Bank said.

Elsewhere in Indonesia, the Bank forecast GDP growth at 6% for 2008 and 6.4% in 2009.

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