Emerging markets slide lower; Ecuador to make coupon payment; Russia-Ukraine gas fight flares up

By Aaron Hochman-Zimmerman

New York, Jan. 13 - Emerging markets traded slightly weaker on Tuesday as many investors waited for new supply and new developments from Washington, D.C.

Ecuador made itself the biggest newsmaker of the emerging world by turning around to offer a payment on its bonds due 2015 after a Dec. 15 default on a payment tied to its bonds due 2012.

The bonds due 2015 tacked on 3.5 points, but legal battles are likely to ensue over Ecuador's de facto prioritizing of its debt.

Elsewhere in trading, the Philippines performed well as Asia remained strong as a category; however, Indonesia suffered on the anticipation of a new batch of supply.

In emerging Europe, Ukraine and Russia were back into last week's dispute over gas transit as oil prices rose to nearly $40 per barrel again on Tuesday.

In the United States, equity stability allowed volatility to ease as the VIX index dropped 2.57 to 43.27 on Tuesday. The index is a common measure of market volatility.

As a sector, emerging markets widened by 2 basis points to a spread of 668 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Ecuador to pay 2015 coupon

Never to be called predictable, Ecuadorian president Rafael Correa and his government have decided to make the full coupon payment on the 9 3/8% bonds due 2015 before the expiration of a 30-day grace period on Jan. 15.

"That turned things upside down," Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, said.

The bonds due 2015 jumped 3.5 points to 37 bid, 40 offered, while the bonds due 2012 and 2030 rattled between 30 bid and 31 bid.

Controversy followed closely behind the decision as holders of the defaulted 2012 bonds will likely demand to seek similar consideration in the courts.

"You can't discriminate against bondholders," Alvarez said.

LatAm waits for news

Latin America traded lightly as it felt as though the category were "on a ledge looking to see what develops on the U.S. side," Alvarez said.

Primary marketeers continued to wait for news from Peru, but there was nothing solid through the New York afternoon, Alvarez said.

"It's all about timing, and sentiment sort of lost momentum," he said.

In trading, "the category in general has not shined," he said.

On Monday, "Brazil led a kind of consolidation," but Tuesday it was the high-betas which took the sector "a couple steps back," he said.

The 8 1/8% Brazilian government bonds due 2037 were unchanged at 106 bid, 106.5 offered.

Argentina's 8.28% discount bonds due 2033 were seen lower by 0.375 point at 32.65 bid, 34.35 offered, while Venezuela's 9¼% bonds due 2027 were off by 0.875 point to 58.75 bid, 59.5 offered.

Kexim tightens, KDB expected

The Asian primary has seen less supply than some of the other credit sectors, which has lent the technicals a greater degree of support, a trader said.

Still, Monday's rare new issue from the Export-Import Bank of Korea performed well on Tuesday.

The spread on the new five-year notes ended about 30 bps tighter at 583 bps bid.

Investors were also perched and waiting for another high-grade issue from the Korea Development Bank.

Rumors of another benchmark deal suggested that the lender may offer bonds next week, the trader said.

Asia trading mixed, thin

In the major names in Asia, trading remained light and without conviction despite the slowing of Monday's fall, the trader said.

"Equities are relatively stable, and we just haven't had as much volume of issuance as elsewhere," he said, which is "at the margin, supportive."

Still, "we're not seeing the shorts get put back into the market," he said.

The Philippines continued to outperform the category, he said, as anomalies in the curve began to soften.

"A pretty big inversion from the 16s and 17s out" was noticeably flatter on Tuesday, with the longer portion of the curve, "the 19s and out [are] close to flat now," he said.

Also in the Philippines, November export figures dropped by 11.9% to $3.5 billion, compared to $4 billion in November 2007, according preliminary data released by the National Statistics Office.

The November numbers put the 11-month growth at negative 11.9%.

The Philippine government bonds due 2030 were again unchanged at 111 bid, 112 offered.

The new bonds due 2019 were seen at 101.875 bid, 102.25 offered.

Elsewhere, "Indonesia is underperforming pretty significantly," he said. "We're going to get supply there."

Meanwhile, the government announced that ExxonMobil does not have the right to develop the Natuna-D Alpha oil field, reported the Jakarta Post.

The government claims ExxonMobil's permit expired in 2005, but Exxon is likely to take the fight into the courts, the report said.

"The contract has been terminated since 2005. We have tried to negotiate with them, but the process hit deadlock," said energy and mineral resources minister Purnomo Yusgiantoro.

The government would like state oil firm PT Pertamina to develop the site, but Pertamina will need at least $52 billion in outside financial backing to complete the project.

The Indonesian sovereign bonds due 2018 dropped 1 point to 79 bid, 81 offered.

Tensions hotter in gas fight

It seemed on Monday that the gas crisis between Russia and Ukraine, which affected the populations of the European Union and as far south as the Balkans and Turkey, would be over by Tuesday.

Both sides agreed to allow E.U. monitors to oversee the shipments of Russian gas to Ukraine and through Ukraine to the West.

Still, on Tuesday Russia accused Kiev of blocking the supply it returned to the pipelines that morning.

"We did not close the door. We are doing our utmost to resume flows to our customers. Unfortunately we can't transit gas physically through Ukraine," OAO Gazprom deputy chairman Alexander Medvedev told reporters.

The first supplies were intended for the Balkans and Moldova, Gazprom said in a statement.

Elsewhere, Turkey's Koc Holdings AS secured a $770 million loan from a 14-member financial consortium, reports said.

The $320 million one-year tranche came at Libor plus 250 bps, while the €339 million three-year tranche came at Euribor plus 450 bps.

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