Emerging markets close mixed; short covering in high-betas; primary faces summer damper

By Aaron Hochman-Zimmerman

New York, July 3 - Emerging markets traded mixed on a day abbreviated by the coming Independence Day holiday in the United States.

A late day rally was spurred by short covering in equities which translated to short covering in some of the high-beta credits including Argentina and Venezuela.

Argentina added 1.5 points to its benchmark discount bonds due 2033.

The emerging markets primary was silent ahead of the day off, but will return to the rest of the third quarter which may be a critical time for new issuance, an emerging market strategist said.

"If over July there's not enough issuance, there's going to be zero issuance in August," he said.

Still, in order to establish a more positive trend emerging markets will have to tangle with toxic influence from the U.S. markets, he said.

"It's just a little too early to call a bottom to the market," he said.

"I don't expect the market to recover until we see some better than expected results from the U.S. banks," he said as the market looks ahead to the second quarter's earning season.

"Today's data just confirmed that there are still more skeletons in the closet," a trader said about the overall U.S. economy.

"You can't turn sentiment around on a three-day weekend that easily," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

Meanwhile, on a wild day for equities, volatility spiked in the morning before trailing off and ending lower by 1.14 to close at 24.78. The index is a common measure of market volatility.

As a sector, emerging markets tightened by 1 basis point to a spread of 300 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will accept to hold assets in emerging markets debt.

The EMBI global diversified index was tighter by 1 bp with a spread of 324 bps.

The diversified index has a less strict liquidity rule for inclusion.

Short covering in LatAm

Latin America saw some short covering in the high-beta credits through the light holiday volumes.

"There was a slight push in Colombia, some short covering in Argentina and Venezuela has some firmness, but that's all on the price of oil ... Those are the three protagonists," IDEAglobal's Alvarez said.

In Colombia, as 15 hostages were rescued from the FARC, the peso and the local equity market felt a lift, whereas "on the debt side you see a tiny, tiny step up," Alvarez said.

The 8 1/8% Colombian bonds due 2024 added 0.6 point to 116.5 bid, 118 offered.

Argentina saw its short covering after early selling even as threats and accusations fueled the hostile environment between the government and the striking farmers.

Former president and Peronist party chairman Nestor Kirchner accused the farmers of making a bomb threat at a market shortly before he was scheduled to speak.

"It is clear that there are political and economic sectors intent on stopping the changes and destabilizing Argentina. The evidence is that today they called to say that they had planted a bomb at the wholesale market," he said, according to the Buenos Aires Herald.

Nestor Kirchner also encouraged legislators to pass the bill they are considering which would increase the export taxes on farm crops.

The 8.28% Argentine government bonds due 2033 bounced by 1.5 points to 75.5 bid, 76.5 offered.

Meanwhile, oil prices boosted Venezuela's 9¼% government bonds due 2027 up by 1.25 points to 94.5 bid, 95.25 offered.

Also in Latin America, Brazil's 7 1/8% bonds due 2037 fell by 0.375 point to 109.8 bid, 110.2 offered.

Primary enters critical phase

With issuers from emerging Europe in the lead, primary volume in the second quarter experienced "a dramatic turnaround," a strategist said.

The $35.4 billion in sovereign paper sold in the first half matches 86% of the 2007 total issuance of $41.3 billion, he said. But corporate issuance at $44 billion in the first half is 52% behind 2007's pace.

Still, if issuance does not pick up before the historical August slowdown, new deals may be too tightly compacted into the fourth quarter, which may lead to oversupply and widening spreads, he said.

Asia dead, with poor tone

With most desks understaffed on the day before Independence Day, Asian credit had a "very dead day," a trader said.

However, like the rest of emerging markets "the tone is very poor," he said, adding that the sector is "not immune to the sell-off seen in the U.S. and Europe."

In the Philippines, the central bank maintained its forecast of double-digit inflation in June, but said it will take the necessary steps to control inflation, according to a press release.

Inflation is expected to peak in the third quarter, but should still keep total inflation for 2008 between the 7% to 9% target.

In 2009, the government has set a target of 4% to 6%.

The bank also predicted that greater production will have a stabilizing effect on food prices along with high commodity prices cutting demand.

The peso was seen trading at 45.25 to the dollar.

The Philippine government bonds due 2030 fell 1 point to 121 bid.

In Indonesia, above objections of some in the House of Representatives, the government and legislature reached an agreement to cut taxes on corporate dividend payments, according to the Jakarta Post.

Two of the largest groups in the legislature fought for a 5% cut to create a 15% tax, but the remaining eight groups argued for a 10% cut.

The bill has not been finalized, but is expected before the end of the week of June 30.

The Indonesian sovereigns due 2017 also dropped 1 point to 94 bid.

In Pakistan, the United Kingdom has pledged an additional $1 billion in aid to help the country combat terror, according to the BBC.

Specifically the money is intended to be used for education and healthcare programs in the tribal regions along the border with Afghanistan.

The Pakistani bonds due 2017 added 2 points to 74 bid.

Emerging Europe bounces late

Emerging Europe saw early "panic selling in the morning just ahead of the ECB hike," an emerging markets strategist said.

After the selling spurt, buyers came in looking for deals ahead of the long weekend, he said, especially in struggling Turkey where the military has asked the country to remain composed in the face of the trial to ban the AK Party and the arrests of suspected coup plotters.

President of the Turkish Union of Chambers and Commodity Exchanges, Rifat Hisarciklioglu, said the arrests are similar to the actions of a military government.

Meanwhile, in the closed door hearings against them, the AKP offered its defense stating that it is pro-democratic and pro-European Union.

The party's critics have called it anti-secularist and suspect it has a hidden agenda to enforce Shariah law.

Still, if the AKP, which won 47% in last year's elections, is disbanded, many expect it will largely return with another name.

Meanwhile in Russia, the state-run energy firm OAO Gazprom warned that Russian gas may cost European customers $500 per cubic meter by the end of the year, Gazprom chief executive officer Alexey Miller told reporters, according to the Itar-Tass News Agency.

Still, if in the future crude hits $250 per barrel, Russian gas will be hiked to $1,000 per cubic meter, Miller said.

Light sweet crude set a new record on Thursday at $145.85 per barrel.

In Georgia, the head of the rural interior department of South Ossetia, Nodar Bibilov, was killed by a bomb on Thursday morning, Itar-Tass relayed from South Ossetia's local news service.

The report cited an earlier attempt on Bibilov's life, allegedly by Georgia's secret service.

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