Emerging markets fall on harsh tone; Israel Electric offers benchmark bonds; Obama rally evaporates

By Aaron Hochman-Zimmerman

New York, Jan. 20 - Citizens of the world were uplifted by the inauguration of president Barack Obama, but the world's markets were not.

Traders sold as they were reminded throughout the day that the task facing the new American president is only surpassed by the ambitious expectations of those who view him as the instant cure for what has poisoned the market and the world.

"It's shades of the fourth quarter of '08 all over again," a trader said about the emerging markets on Tuesday.

"He gave a speech which was uplifting, as expected; unfortunately he didn't deliver anything new," the trader said.

When history looks back on Obama, he will be remembered as "being one who turned this country around," he said, but now "expectations are simply way too high."

Equity and credit markets around the globe sank as if to prove the limits of the administration's power.

Trading across the emerging market credit space was light and generally negative, but primary action was able to surface from Chile's Corporacion Nacional del Cobre and the Israel Electric Corp. Ltd.

Also as equities plunged, volatility rifled up by 10.54 to end at 56.65, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets widened by 3 basis points to a spread of 682 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.

Emerging Europe favors primary

Emerging Europe traded without any lift from the early rustlings of the Obama family around Washington, D.C., ahead of the new president's swearing in.

"It's pretty quiet," a London-based trader said.

In place of an expected Obama rally, "it's getting wider to be honest," he said about spreads.

Monday's equity market in London set the week off on a sour tone full of "more government bailouts" and the idea that "this isn't over," he said.

"I don't think people care that it's Inauguration Day," although it is possible that "the people who would support a rally are out of the market," he said.

Turkey's bonds due 2030 were seen at 142.25 bid, 143.25 offered as prime minister Recep Tayyip Erdogan was in Brussels to discuss E.U. accession with European Commission president Jose Manuel Barroso.

With weak trading, the market focused on the primary, which supported a rumor, still lingering from last week, of a possible five-year issue from Poland, the trader said.

The issue should come at the level of Poland's five-year CDS spread of 280 bps mid, he said, but a similar new issue from Greece is likely to price toward the wider end of its spread, near 300 bps.

Also, Israel Electric announced a dollar-denominated benchmark medium-term bond offering (Baa2/BBB+).

Citigroup and JPMorgan will act as bookrunners for the deal.

A roadshow will began in Europe and the United States on Tuesday.

Israel Electric is a Haifa, Israel-based publicly controlled utility.

Russia to skip issuance

Elsewhere in emerging Europe, Russia's finance minister, Alexei Kudrin, said his country will return to the international debt market within a few years but would not do so this year.

Kudrin supported the plan to devalue the ruble in order to stave off financial crises and added that Russia will look to attract new foreign capital investment when the ruble strengthens.

The ruble was seen trading at 32.943 to the dollar.

Meanwhile, the gas flow was returned to Europe on Tuesday as the Russian government and oil giant OAO Gazprom opened the lines through Ukraine after a deal was signed with Kiev's gas firm NJSC Naftogaz Ukrainy.

"Russian gas transit to Europe across Ukraine and gas supplies to Ukrainian consumers were initiated under the agreements reached at night on Jan. 18 by Russian prime minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko," a Gazprom statement said.

The new contracts, which will expire in 2018, include a provision for the gas companies to deal directly with "no intermediates between the companies," the Gazprom statement continued.

The sides arranged pricing contracts for gas and gas transport, which are valid until 2012.

However, the Ukrainian president's office issued objections to the deal brokered by Timoshenko. Energy security representative Bohdan Sokolovsky said the deal is "discriminatory" and favors Russia.

The Russian sovereign bonds due 2030 were seen trading at 89.125 bid, 89.5 offered.

The Gazprom notes due 2034 were seen trading at 81.5 bid, 83.5 offered.

LatAm 'getting bombed'

Latin America was also left flat without an Obama bounce.

"Things are getting bombed. It's all passed through the U.S. banking sector; it's negative in the U.S. and it's negative in Europe," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

In the primary, Chile's Corporacion Nacional del Cobre launched a $600 million 10-year senior unsecured bond (A1/A/A); however, terms were not readily available.

HSBC and JPMorgan acted as bookrunners for the Rule 144A and Regulation S deal.

The coupon was expected at 7½% with a spread of Treasuries plus 537.5 bps.

Codelco is a Santiago, Chile-based nationally owned copper producer.

"They're a highly reputable entity, but copper prices are like a toss up," Alvarez said.

Elsewhere in trading, issues were dragged lower by Brazil and Mexico.

The 8 1/8% Brazilian bonds due 2037 were off by 2 points to 104.25 bid, 105.75 offered, while the 5.95% Mexican bonds due 2019 fell by 1.15 points to 96.4 bid, 97.4 offered.

Also in Latin America, Argentina's president Cristina Kirchner traveled to Cuba to meet with president Raul Castro as the two signed treaties of cooperation in the fields of health and technology, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 managed to add 1.25 points to 34.65 bid, 36 offered.

Venezuela's 9¼% government bonds due 2027 gave up 0.875 point to 65.625 bid, 68 offered.

Asia slides in dismal environment

For its part, Asia's Obama rally "lasted about 15 minutes," a trader said.

Hedge funds and private equity players set up a "sell the news situation," he said.

In "very light trading action" Indonesia slipped slightly lower as the bonds due 2018 lost 1 point to close at 75 bid, 79 offered.

In the Philippines, government-controlled Manila Electric Co. (Meralco) announced that regulators granted it permission to issue more debt, the Manila Times reported.

"The ERC has authorized Meralco to incur the said long-term debt," Meralco regulatory affairs chief Leo Mabale said about the Energy Regulatory Commission in the report.

"This borrowing will help us render improved and more reliable service to our customers," he added.

The Philippine sovereigns due 2019 held on respectably and finished at 103.25 bid, 103.75 offered.

Even Pakistan saw some institutional interest after a patch of "no news is good news" for the troubled country, the trader said.

The bonds due 2017 moved as high as 40.5 bid overnight but closed at 39.75 bid in New York.

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