Emerging market debt firmer in light trade

By Reshmi Basu and Paul A. Harris

New York, July 10 - Emerging market debt was firmer Monday during an uneventful session, as inflationary worries in the United States continue to loom over the market.

The market saw more stability during the day, coming off Friday's lackadaisical performance, in which spreads remained unchanged on the back of declining U.S. stocks. In that session investors interpreted surging oil prices, corporate profit warnings and weaker than expected non-farm payroll numbers in the United States as signals that the economy is cooling.

Those concerns over inflation are "keeping investors at bay," remarked a market source Monday.

Heading into the weekend, traders were expecting the sovereign benchmarks to tighten much more than they did on Monday, according to a sellside source.

"Late in the day Venezuela and Brazil were a touch tighter relative to the Friday close. But activity was unexpectedly light today [Monday]," noted the source.

During the session, the bellwether Brazilian bond due 2040 edged up 0.30 to 125.20 bid, 125.30 offered. The Ecuadorian bond due 2030 added 0.25 to 97.35 bid, 97.75 offered. And the Turkish bond due 2030 was up 1.38 to 140 bid, 140.50 offered.

The market is looking for clear signs as to the direction of the economy as well as inflationary pressure, noted the market source quoted above. The problem is that U.S. economic data is sending mixed messages. And investors are unwilling to get their feet wet until there is some sort of definition as to the health of the economy, observed the source.

Another source noted that investors were overall positive about the medium-term outlook for the asset class. Last Thursday, the Emerging Markets Traders Association held a forum at which both buyside and sellside panelists discussed the outlook for the asset class.

The buyside panel was more bullish than its sellside counterparts, noted the source. The buyside group saw the recent sell-off as a much needed correction and not the start of a dismantling of positions. On the other hand, the sellsiders were worried about the effect of ongoing global liquidity withdrawals as well as global monetary tightening.

On the primary front, there are a few requests for proposals floating around which could generate some deals in the coming days and weeks, according to the sellside source.

But there are no solid mandates.

Ukraine on the defensive

Signs of that a ruling coalition is emerging in the Ukraine parliament, comprised of the Socialist Party, the Regions Party (of Viktor Yanukovich) and the Communist party put further pressure on investors' already defensive view about Ukrainian sovereign bond prices, according to a market source.

The source said the euro-denominated 4.95% sovereign bonds due Oct. 13, 2015 were trading 87.25 bid, 88.25 offered in Europe on Monday, off about 30 cents, although slightly higher than their all-time low of 87 bid last week.

Last week in a secret vote the Rada, as the parliament is called, elected Alexander Moroz from the Socialist Party as parliamentary speaker. Although still nominally part of the west-leaning Orange Coalition, the Socialists decided to break that coalition agreement with the nomination of Moroz as speaker.

A coalition between the Socialists, the Regions Party and the Communist party would have 240 votes - 14 more than the number needed to secure a Rada majority.

Although the Orange Coalition could still survive, the west-leaning Yulia Tymoshenko bloc and the Our Ukraine party are now expected to face an uphill battle.

The emergence of the Socialist-Regions-Communist coalition, while posing a possible threat to global investors - slowing structural reforms and privatizations - should leave president Viktor Yanukovich in a stronger position to negotiate gas prices with the Russian monopoly, Gazprom, noted the source.

JP Morgan has cut Ukraine's exposure to underweight from overweight, citing political instability, the direction of the current account, and oil prices, according to a source.

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