Emerging markets mixed amid external shocks; high-betas hammered; South Korea pulls dollar offering

By Aaron Hochman-Zimmerman

New York, Sept. 12 - The emerging markets sectors varied in volume and success on Friday.

Emerging Europe followed a usual pattern of buying early and selling late as flows kept traders tied to their desks, while Latin America was hurt by the high-betas over slow flows.

Meanwhile, Asia traded calmly on its way to ending a volatile week on a positive note.

Lehman Brothers Holdings Inc. and major financial institutions provided almost all of the week's heartburn for investors.

The question of what will become of Lehman preoccupied investors even more than specifically emerging market concerns.

"It'll definitely be better or worse on Monday," a trader said, providing the only certain answer to the uncertainty that surrounds the immediate future of the market.

In emerging market trading on Friday, Venezuela proved to be the big loser after it expelled the U.S. ambassador from Caracas.

It also expelled 3 points from its benchmark bonds due 2027.

In the primary, South Korea pulled its 10-year dollar deal rather than pay the premiums the market would have expected after the hectic week.

Despite a few deals which linger on some calendars, a syndicate desk official guessed that there will be no significant new emerging market issues until investment-grade issuance picks up.

The question mark that loomed over the major markets pushed volatility higher by 1.27 to 25.66, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector, emerging markets managed to tighten by 7 basis points to a spread of 328 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

South Korea pulls offering

In the primary market, the Republic of Korea (A2/A/A+) pulled its proposed dollar-denominated 10-year global bond offering due to unfavorable market conditions.

"That's the big one today," a trader said about the talk at the trading desk.

The South Korean government also cited external factors such as the damage caused by Lehman Brothers and the rumors of the poor health of North Korea's leader Kim Jong Il, a market source said.

Barclays, Goldman Sachs, HSBC, Lehman Brothers, Samsung Securities and UBS were intended to act as bookrunners for the deal, which came from a $5 billion issuance program.

Proceeds from the sale were intended to be used to purchase foreign and domestic currency, for deposits and loans to foreign and local banks as well as refinance debt.

"It's not as though they couldn't print," a syndicate official said.

"They just didn't want to pay these prices," the official added.

"It's one of those things where the markets [are] used to getting a decent concession and this was an incredibly difficult week," a trader said.

LatAm sinks waiting for Lehman

In trading, Latin American trading felt calmer on Friday, but there was no doubt in anyone's mind that, for better or worse, the broader market's fate was hitched to Lehman Brothers.

"They should have just closed the market today," a syndicate official said on Friday.

In Argentina, president Cristina Kirchner may have cancelled a trip to Venezuela as the case proceeded against Antonini Wilson in Miami, according to a report in the Buenos Aires Herald.

Wilson, who is a U.S. and Venezuelan citizen, stands accused of attempting to smuggle $800,000 to Kirchner's presidential campaign from Venezuelan president Hugo Chavez.

The 8.28% Argentine discount bonds due 2033 dropped another 1.3 points to 67.25 bid, 67.7 offered.

Also in Latin America, Brazil's 7 1/8% Brazilian government bonds due 2037 were quoted at 109.5 bid, 109.85 offered.

Venezuela pounded

Venezuela and the United States recalled their respective ambassadors as tensions between the two rivals reached a peak on Friday.

As Chavez expelled U.S. ambassador Patrick Duddy, he gave him 72 hours to leave Caracas and told him to "Go to hell 100 times," reports said.

The U.S. also froze the assets of Hugo Armando Carvajal Barrios and Henry de Jesus Rangel Silva, two Venezuelan officials, accusing them of providing aid to drug traffickers.

Bolivia expelled its U.S. ambassador, while Honduras refused to accept its incoming ambassador.

All the while, Russian Tu-160 Blackjack bombers are currently deployed to Venezuelan airfields for joint exercises.

"Hasn't everyone given up on Vene?" a syndicate official asked, unsurprised at the latest outburst by Chavez.

Light sweet crude also set a five-month low as it broke through the $100-per-barrel barrier on its decent from a high of more than $147 per barrel in July.

The 9¼% Venezuelan sovereigns due 2027 were battered for 3 points to 84.75 bid, 86 offered.

Meanwhile in Russia, prime minister Vladimir Putin defended his country's actions regarding the invasion of Georgia.

Putin accused the West of perpetuating and accepting false media accounts of the conflict leading up to the invasion.

Putin also railed against the accusation that the Russian response was disproportionate.

"Should we have swung our penknives at them? What is proportional use of force when tanks and heavy artillery are used against us? Should we have fired with a slingshot? They had to expect to be hit hard in the face," Putin said, according to the RIA Novosti News Agency.

The Russian sovereign bonds due 2030 slipped 0.125 point to 109.5 bid, 109.625 offered.

Emerging Europe widens into close

Meanwhile, in the rest of emerging Europe, the market stayed "very busy" on volatility and high volumes, a trader said.

"Generally people are looking for bids on cash and two ways on CDS," he said.

Moreover, in recent sessions the afternoons have reversed whatever trends were set in the morning, he said.

Typically the tights have come in the morning, but investors "don't want to hold overnight risk," he said.

The pattern has been consistent enough for an investor to do very well, he said.

Turkey has proved to be a volatile credit and a slight outperformer for the week.

"It's tighter now, same with the cash," he said during the end of London's session on Friday.

The Turkish government bonds due 2030 added 0.75 point to 150.75 bid, 151.5 offered.

In Ukraine, the fissure between the former allies president Viktor Yushchenko and prime minister Yulia Timoshenko grew wider as Timoshenko was questioned as a witness by prosecutors investigating the 2004 dioxin poisoning of Yushchenko.

Timoshenko said the move was entirely political and connected to the jockeying for position between the two leaders in the run up to the 2010 presidential elections, reports said.

Still, Ukraine "is very well bid," the trader said.

The Ukrainian sovereigns due 2016 were quoted at 81 bid, 82.5 offered.

In corporates, Russian Railways JSC asked Barclays, ING and Morgan Stanley to lead a eurobond deal worth about $600 million.

The deal is expected to print before the end of the year.

Barclays was asked in July to lead a $1 billion offer, but the offer was withdrawn.

Russian Railways is a Moscow-based government-run rail operator.

Asia finishes week strong

The Asian market has "traded pretty well," a trader said, after "wednesday and Thursday, the market definitely moved wider."

Still, "it's going to be a totally different environment on Monday," he said.

"We are seeing some movement now; Philippines is outperforming," he said.

In the Philippines, the central bank announced that it expects the country's 2008 dollar surplus to be $500 million lower than originally predicted, the Manila Times reported.

Due to high oil prices and low export figures, the surplus is now forecast at $2 billion.

"It's because of higher oil prices but was offset by the remittances of overseas Filipino workers, which grew 17% [recently]," said bank governor Amando Tetangco in the report.

The Philippine government bonds due 2030 were seen at 129.5 bid, 130 offered.

In Indonesia, investors came in to buy protection for the credit, even as "the rupiah was under significant pressure [on Thursday]," the trader said.

Also, bottlenecks at the Tanjung Priok port compelled the government to begin work to reduce the congestion by issuing penalties for failing to remove goods that have cleared customs.

Goods typically wait at the port for three to eight days to clear customs only to wait another "few days" to be removed by the importers, the Jakarta Post reported.

In the past the entire process only took about three days, a trade ministry official said.

To cut warehousing costs, some importers leave goods at the port "for months" as "it is more expensive for them to pick the goods up immediately and keep them in warehouses than to keep them here," said an anonymous source, according to the report.

"There are containers that have been here since January 2008," the source said.

The rupiah was seen trading at 9,321.56 to the dollar.

The Indonesian bonds due 2017 were quoted at 101.375 bid, 102.25 offered.

In Vietnam, the U.S. deputy secretary of state John Negroponte praised the growing ties between the two countries during a visit to Ho Chi Minh City.

A trader also saw more buyers of Vietnam's protection, reflecting "the relative sort of consensus view on inflation," he said.

As the currency continues to improve, "the bonds are still technically well-supported" as well, he said.

The dong was seen trading at 16,540 to the dollar.

The Vietnamese bonds due 2016 were seen at 98 bid, 100 offered.

Also in Pakistan, the government bonds due 2017 were seen relatively unchanged at 60 bid, 62 offered.

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