Emerging markets trade mixed; emerging Europe overshadowed by Roche bond sale; LatAm drifts

By Aaron Hochman-Zimmerman

New York, Feb. 18 - Emerging markets held in mixed as equities scraped the bottom of their 2008 lows.

The category showed its dependence on the major markets as investors in emerging Europe were distracted by the $16 billion behemoth multi-tranche bond issue from Switzerland's Roche Holdings Inc.

Meanwhile, the rest of the category's issues largely matched equities by waffling and then returning to their starting places.

Venezuela managed to stand out as finance minister Ali Rodriguez announced some prudent spending cutbacks, which investors endorsed to the tune of a 3-point gain for the Venezuelan bonds due 2027.

The primary remained silent even in the wake of recent rumors about issues from Indonesia and the Czech Republic.

Equities struggled to stay above the 2008 lows as volatility ended lower by 0.20 at 48.46, according to the VIX index. The index is a frequently used yardstick of market volatility.

As Treasuries sold off, emerging markets wound tighter by 17 basis points to a spread of 674 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.

Major markets dominate Europe

Emerging European trading was slow as cash has been steadily siphoned off by corporations in the European Union and Switzerland, a trader said.

One client bought in Russia, he said, but "we personally believe it's no good," he said.

The government has been obliged to be overly involved in the economy, he said. Moscow buys diamonds and oil that cannot fetch a strong price on the open market.

Elsewhere, the International Monetary Fund may be required to ride to the rescue of Kazakhstan, and in Ukraine, "nobody knows what's going on," he said.

"We are not so positive," he said about emerging markets.

The action has been in developed European corporate bonds denominated mostly in euros, he said. "The music plays in the corporate bonds," like Roche, he said.

A number of the issues are "oversubscribed many times," he said.

The trail leading to the expected €1 billion issue from the Czech Republic has grown cold, he said. "It's been a couple of days already."

Meanwhile in Russia, prime minister Vladimir Putin said the 4.8 trillion rubles in the reserve fund "is sufficient for balancing the federal budget this and next year," according to the Itar-Tass News Agency.

"We will have less revenues than expenditures. However, the budget deficit will be covered from domestic sources: borrowings on the domestic market and the reserve fund," Putin added.

The Russian government bonds due 2030 lost 0.625 point to 88.75 bid, 89.25 offered.

The Ukrainian sovereigns due 2016 were quoted at 36.5 bid, 38 offered.

Elsewhere in Turkey, the U.S. ambassador, Jeffrey James, offered his support to the IMF's plan for assistance to Ankara, reports said.

Talks between the government and the IMF were put on hold after prime minister Recep Tayyip Erdogan told the IMF officials that the terms of the aid were too demanding.

The Turkish sovereign bonds due 2030 were quoted at 126.75 bid, 127.75 offered.

LatAm slides to the side

Latin America traded laterally on Wednesday, according to Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Trading was "glued to the U.S.," he said, which may have left the category with a "very minute recovery."

"There's no major trend developing," he said.

Venezuela was the clear outperformer in the category.

Investors "can hold out in Venezuela," Alvarez said, as long as there are "no major screw ups in oil production," which has maintained a rate of 2.4 million to 2.5 million barrels per day.

Even at the current price of oil "he should be able to pay," Alvarez said about president Hugo Chavez and his government.

Meanwhile, the spike in prices came thanks to spending cuts and limits on the import of non-essential goods announced by finance minister Ali Rodriguez.

The 9¼% Venezuelan sovereigns due 2027 jumped 3 points to 54 bid, 54.5 offered.

Meanwhile, trade representatives from Argentina and Brazil met to ease the restriction of growing trade barriers, the Buenos Aires Herald reported.

Brazil has accused the Argentine side of passing protectionist policies.

The sides will resume talks on March 4, where Argentina will attempt to remedy its $4.3 billion trade deficit, the report said.

The 8.28% Argentine discount bonds due 2033 added 0.5 point to 30 bid, 30.75 offered.

The 7 1/8% Brazilian government bonds due 2037 tacked on 0.75 point to 98.75 bid, 99.5 offered.

Asia pulls tighter

In Asia, spreads were able to tighten as investors loosened the collective grip on the safety blanket of Treasuries.

In the Philippines, the central bank announced that commercial lending increased by 17.5% in December compared to December 2007.

Domestic liquidity was also up 15.6% in December compared to December 2007.

In Indonesia, U.S. secretary of state Hillary Clinton asked Indonesia to play a larger role in regional trade, diplomatic and environmental issues.

"Building a comprehensive partnership with Indonesia is a critical step on behalf of the United States' commitment to smart power," she said, according to reports, adding that "it's no accident that I'm here."

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