Emerging markets stumble; new issue supply well-absorbed; emerging Europe shakes off gas crisis

By Aaron Hochman-Zimmerman

New York, Jan. 8 - Emerging markets eased off of the swift pace that began a week full of new issues and strong trading.

U.S. equity pressure and the completion of the first salvo of new issues in 2009 set investors back on their heels.

For any deals remaining on the calendar, which could not be forced through the primary this week, "the window of opportunity at least in the short-run is closed," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The deals that were completed were received well, Alvarez said, but sentiment and risk have been drained by volume and sour economic data.

The week's trading successes faded on Thursday as well, except in the unlikely emerging Europe, where a flare up over the supply of gas between Russia and Ukraine was just starting to extinguish.

Stocks were able to mount a half-hearted late-day rally, but investors were only slightly more encouraged.

Still, volatility sank by the end of the day as equities clawed higher to the close. The VIX index fell by 0.83 to 42.56, on Thursday. The index is a common measure of market volatility.

As a sector, emerging markets were stretched wider by 18 basis points to a spread of 653 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

High yields move emerging Europe

As populations across Europe looked to governments for reassurance that their gas supplies would not run out, investors have used the opportunity to put long-hidden cash to work.

When asked about the effects the crisis had on investing, a London-based trader said: "To be honest, it didn't ... especially in this rate environment."

"I don't think people are necessarily focusing on it," he said.

The trading has been moderate and cash centered, he said.

CDS trading narrowed at the beginning of the week and is now slipping wider, but "all the focus is on cash" and "everyone wants to buy," he said.

The popular products have been "short to maturity, high yielding stuff," he said, for example: "short in Hungary and Romania."

The Hungarian sovereigns due 2010 were seen at 95.5 bid, 98 offered, while the Romanian bonds due 2010 were quoted at 95 bid, 96 offered.

Elsewhere, Turkey's newly minted bonds due 2017 were quoted lower by 0.5 point to 99.5 bid, 99.875 offered.

The midnight oil

Still, investors concerned over oil prices fluctuating between $40 and $50 per barrel kept their eyes on overnight meetings in Brussels between representatives from Russia and Ukraine.

By morning in New York, progress was reported from negotiations over the gas crisis, which still threatened to weigh on the entire continent.

By midday, prime minister Vladimir Putin announced that Kiev's NJSC Naftogaz Ukrainy will pay full market value for gas shipments in 2009, but Russia will pay more to Ukraine for the transit of its gas to the West.

Both sides also agreed, in principle, to allow E.U. monitors to oversee the gas lines, which carry fuel through Ukraine to Russia's other European customers.

Still, even as the two sides were coming to terms, E.U. and non-member Central European countries continued to struggle through the conflict with whatever reserves may be available.

In Bulgaria, calls went out for a return to nuclear power, reports said.

Light sweet crude was seen low as $41 per barrel.

LatAm digests new bonds

Latin America traded lower on Thursday, although the new issues, which raced through the market earlier in the week, were absorbed with "no indigestion," said IDEAglobal's Alvarez.

"The market's softer and it's been softer since yesterday," he said during New York's Thursday afternoon.

The weakness was external, he said, not to do with the new issues from Brazil or Colombia or the stimulus package, which may be "cleaning the field for some sort of rate cut" in Mexico, he said.

The 11% Brazilian bonds due 2040 fell 1.3 points to 128.7 bid, 128.95 offered, while the 8 1/8% Colombian bonds due 2024 slipped 1.5 points to 103.25 bid, 105 offered.

High-beta luster fades

Away from the higher-rated credits, "there has been some small unforeseen interest in the high-betas," he said.

Interest is "now dissipating" in Venezuela, "which had been the stronger one due to the bounce back in oil," he said.

Small gains in Venezuela and Argentina were undermined by downward pressure from U.S. equities and economic data.

The 8.28% Argentine discount bonds due 2033 gave up 1.4 points to 33.5 bid, 34.5 offered, while the 9¼% Venezuelan bonds due 2027 dropped 1.25 points to 59 bid, 60.5 offered.

Within the coming weeks, investors will look to Peru to lead the next round of new issues, with Panama and possibly Uruguay to follow.

Peru, with the help of Goldman Sachs, began a two-day non-deal roadshow on the U.S. West Coast on Thursday, but time may be running out on the primary, Alvarez said.

"There'll be much less takers than at the start of the year," he said.

India scopes out missile shield

In India, defense officials have met with representatives of the United States over the possible sale of missile defense batteries, reports said.

A U.S. missile shield in Central Europe has been a sore point for U.S.-Russia relations, and many feel an Indian shield would further strain relations with Pakistan.

Meanwhile in Pakistan, prime minister Yousuf Raza Gilani asked for and received the resignation of national security adviser Mahmood Ali Durrani late Wednesday, the Associated Press reported.

Durrani was a former ambassador to the United States and a supporter of closer ties to India.

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