Emerging markets firm; Russia opens second front in Georgia; Argentina bonds jump on buyback offer

By Aaron Hochman-Zimmerman

New York, Aug. 11 - Emerging markets firmed up on Monday as equities rose and oil fell on a low volume market Monday.

Argentina felt better as its benchmark discount bonds due 2033 rifled up 4 points, but it was saddled, late in the day, with a ratings cut from Standard & Poor's.

Also, Russia continued its campaign through Georgia, which left market watchers divided about the consequences the campaign will have on oil.

"Anytime you have a conflict in the Middle East [or Central Asia] it has an impact on oil," a trader said.

Many pipelines including the Baku-Tbilisi-Ceyhan pipeline run through Georgia, but the volume they carry is "murky at best," the trader said.

Still, volatility in oil prices is always a legitimate concern "anytime you have a potential war going on," he said.

Another drop in oil and a positive day for equities brought volatility numbers closer to 20.00 as the VIX index dropped 0.54 to end at 20.12. The index is a frequently used gauge of market volatility.

Russia rolling through Georgia

In emerging Europe, the raging battle in the Caucasus was the big news around the trading desks, but "we don't see that much flow at the moment," a trader said about Russian and Georgian paper.

"The negatives started without it" and in market terms "it is quite contained," he said.

In Georgia, even president Mikhail Saakashvili was forced to take cover during a bombardment as he visited the town of Gori, reports said. The town was captured by the Russians later in the day.

Saakashvili signed a E.U. supported ceasefire agreement, which has not yet been accepted by Russia's president Dmitry Medvedev.

Medvedev claimed that the "major" portion of the Russian operation in the region is over, but on Monday the Russian military pushed beyond the boundary of the breakaway South Ossetia into Georgia proper. Once across the frontier, the Russian army captured a Georgian military base used to stage attacks in South Ossetia.

Russia also issued a warning to Georgia to disarm and withdraw from its border with the other unrecognized republic, Abkhazia.

After Georgia did not vacate the area surrounding Abkhazia, the second front was opened as Russian columns moved into the second breakaway region.

The broadening war did little to faze traders as the Russian sovereign bonds due 2030 were quoted at 111.825 bid, 122.25 offered.

Meanwhile, NATO-member Turkey stated its desire to see a peaceful conclusion to the conflict, but is in a difficult position, the Turkish Daily News reported.

Turkey shares a border with Georgia and has ethnic groups which support both sides, but as a NATO-member, the government knows it cannot put itself in a position which may lead to war with Russia, the report said.

The Turkish government bonds due 2030 were seen at 149 bid, 149.75 offered.

Analysts have blamed the fighting for a drop in Russian stocks and the recent fall of the ruble.

Bombs have also fallen near the strategic Baku-Tbilisi-Ceyhan oil pipeline, but no damage has been reported.

During emerging Europe's session, oil prices saw a spike of about $3.50 per barrel to nearly $117 per barrel, but some attribute that to the continuing resurgence of the dollar.

"The big news is the dollar," the trader said.

"It made all the commodities change for the time being," he said.

The issue surrounding oil is "whether the dollar can go through the €1.50 level," he said.

The dollar was seen trading at 1.489 to the euro.

Oil later fell to below $113 per barrel.

Argentina soars in quiet LatAm

Latin America traded 5 basis points to 10 bps tighter with a positive tone, but it was "calm like any other Monday," a strategist said.

The most important issue in the sector is the reaction of Argentina's credit to some rare good news for the country, he said.

"We saw better buyers coming in on the buyback of short-term debt by the government," he said.

"Several issues which had been battered are up from 3% to 5%," he said.

The 8.28% Argentine discount bonds due 2033 launched back up by 4 points to 72 bid, 73 offered.

Still, late in the day, Argentina's stumbling fundamentals caught up with its credit rating as S&P dropped its foreign rating to B from B+.

Also in Latin America, Venezuela's 9¼% government bonds due 2027 added 0.25 point to 88.75 bid, 89.5 offered.

Meanwhile, Brazil's 7 1/8% bonds due 2037 were seen at 111 bid, 111.5 offered.

Morales survives recall vote

In Bolivia, president Evo Morales, a left-wing ally of regional leaders such as Venezuela's Hugo Chavez and Ecuador's Rafael Correa, won a recall referendum.

Reports said Morales won by a convincing margin, but the strategist noted that the country is still divided.

In the resource-rich eastern part of the country many feel as though they support the poorer coastal region to the west.

Some consider opposition to Morales, the country's first indigenous president, to be racially based.

Morales said he plans to continue his socialist reforms.

Asia stronger on bubbling oil

In Asia, "there was very little trading going on," a trader said, "It was a quiet summer Monday."

Still, volatility felt high as "everyone [in credit markets] is staring at equities and everyone in equities is staring at oil ... So we're essentially trading oil," he said, and that can be "very, very volatile."

Generally, "the market felt pretty good most of the day and then oil came off the lows," he said, but "everyone left today feeling pretty decent" as many had an expectation of profit-taking after Friday's rally.

In the Philippines, foreign direct investment hit a total of $725 million in the first five months of 2008 after an outflow of $95 million in May, according to a statement from the central bank.

The figure is a sharp drop from the $2.3 billion inflow during the same period of 2007.

"This developed as the investment environment turned more cautious due to concerns about global financial market fragilities and the downturn in many advanced economies including the U.S.," the central bank said.

Also in the Philippines, 130,000 people in the southern regions have become refugees as fighting between the army and Muslim separatists continued.

A recent court decision prevented the Autonomous Region of Muslim Mindanao (ARMM) from expanding into the neighboring province of North Cotabato.

As of Sunday, the army had captured two villages in North Cotabato and continues to fight for 13 others after the Moro Islamic Liberation Front refused to heed a government order to leave the area.

The Philippine sovereigns due 2030 added 0.4 point to 128 bid.

In Indonesia, the central bank revised its prediction of lending growth to 30% from 24%, the Jakarta Post reported.

The accelerated growth largely came from the agribusiness trade and industries, according to Bank Indonesia deputy governor Muliaman Hadad, the report said.

"Lending may grow by between 27% and 30% (this year). It has not shown any signs of a slowdown (as of July)," Muliaman said.

The Indonesian government bonds due 2017 were better by 0.625 point to 99.75 bid.

In Pakistan, leaders of the ruling coalition met ahead of Monday's legislature session.

President Pervez Musharraf will likely face impeachment charges within the week from the coalition.

Musharraf has been asked to resign but has stated that he will fight to remain in power.

To stay in power Musharraf has two options, according to a BBC analyst.

Fight the charges on the floor of parliament or dismiss the government and dissolve parliament, which would require the strong backing of the army.

The Pakistani bonds due 2017 were quoted at 70 bid, 73 offered.

OCBC brings S$1 billion offer

The quiet summer primary market saw a local currency offering emerge from Singapore's Oversea-Chinese Banking Corp. Ltd. (Aa3/A-/A+) as it said it will sell S$1 billion 10-year non-cumulative, non-convertible guaranteed preference shares at a rate of 5.1%.

The offer may increase to S$1.5 billion.

If the shares are not redeemed by Sept. 20, 2018, the shares will pay a floating-rate dividend tied to the current three-month Singapore dollar swap offer rate plus 2.5% per annum.

One-quarter of the shares offered will be sold to the general public through ATM machines in multiples of 100 shares worth S$100 each for a total of S$10,000.

Proceeds from the offering will be used to strengthen the bank's capital position to restructure its finances and grow its business.

OCBC is a Singapore-based retail and commercial bank.

Dollar deals such as the $150 million three-year deal from Ukraine's ZAT Avangard "are in the pipeline, but I don't think it is possible to bring anything to the market at the moment," a trader said.

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