Economic concerns weigh on emerging markets; weekly inflows modest; Vinacomin notes on tap

By Christine Van Dusen

Atlanta, Nov. 19 - Forward momentum on bailout talks for Ireland couldn't inspire emerging markets investors and issuers to come off the sidelines on Friday, spawning light volumes, sideways trading and no new issuance in emerging markets.

The market instead remained focused on the sovereign's troubles - and the potential for the debt disease to spread to other peripheral European countries - as well as China's monetary tightening and the distraction of the upcoming Thanksgiving holiday.

So while Ireland's progress on a deal with the International Monetary Fund and European Union improved risk sentiment overnight on Thursday, spreads still widened by about 2 basis points on Friday morning on the JPMorgan Emerging Markets Bond Index Plus, according to a report from RBC Capital Markets.

"The news of China increasing its reserve requirement saw the market trade a little weaker" by afternoon in Europe, a London-based market source said.

As the day went on, it was "very quiet as we fade into the weekend," he said. "Flows are light."

Said a New York-based market source: "I've basically been sitting on my hands today. There are no new issues or anything like that in EM today."

Trading treads water

Any market moves "haven't been extremely pronounced," said a Toronto-based market source.

Most names were trading sideways on Friday, with just Argentina standing out with its discount bonds trading about ¾ of a point better at 92¼ bps.

"We've had a lot of volatility and back forth during the entire week, with the cues essentially coming from Ireland," said Enrique Alvarez, debt strategist with think tank IDEAglobal. "The speculation on the potential for some financing for Irish banks has helped determine the risk-on and risk-off trade, and sort of bouncing on a day-to-day basis."

Friday saw EM assets sell off before midday, but more modestly than during previous episodes, according to a Barclays Capital report.

And by afternoon there was a "sort of quieting," Alvarez said. "We're now treading water."

The scene could change early next week, the London-based trader said. "We could see some action. But we have Thanksgiving on Thursday, so Thursday and Friday will be dull here."

Vinacomin notes whispered

Also on Friday, the planned issue of $200 million to $300 million 10-year notes from government-owned coal producer Vietnam National Coal and Mineral Industries Holding Corp. Ltd. (Vinacomin) was whispered at a yield in the low 7% area, a market source said.

Credit Agricole, Citigroup and ANZ Securities are the bookrunners for the Rule 144A and Regulation S deal.

And Moscow-based lender VTB Bank announced plans for a roadshow with BTG Pactual and VTB Capital, a market source said.

Depending on market conditions, the company could issue real-denominated notes before 2011.

"Apart from that, it's been dull," the London trader said. "There's been no issuance that I've seen today."

The New York-based source expects the pace will stay slow until the new year.

"It's a Friday. We've got a short week next week, and of course there was some volatility earlier in the week," he said. "But most of the supply that was really expected for EM and telegraphed has already come and gone.

"There are a few deals that we would still expect to price before year-end, but things are going to be significantly quieter for the balance of the year. We could see a few transactions, but the pace is going to be much slower."

Brazil in focus

Friday also saw a continued focus on Brazil and president-elect Dilma Rousseff's cabinet choices, as well as the impact of trade partner China's attempts to curb inflation.

"With Brazil, it's about what the cabinet is going to look like," Alvarez said. "But that's not affecting sovereign prices a great deal. There have been a lot of negatives on the local markets that are results that essentially come out of the concentration on the risk-off trade. There's been a lot of profit-taking and a lot of pullback of investors there."

Brazil is concentrating on growth, a market source said. "If anything they're preoccupied with inflation. I think investors are watching very closely for dismal wholesale inflation expectations. That's going to remain the concentration going into Monday and might create some additional noise."

Also creating noise in Brazil on Friday was the continued story of Banco Panamericano, which received a $1.5 billion-equivalent bailout after an investigation found accounting irregularities.

Though other banks haven't been directly hurt by Panamericano, the lender's troubles have shed an unflattering light on Brazil's banking sector. Just this week two lenders, Banco Bradesco and Banco Industrial e Comercial SA, canceled plans for bonds.

EM funds get inflows

Emerging markets bond funds were among the only of the major fund groups to see inflows during the week ended Nov. 17, according to data tracker EPFR Global.

A total of $397 million flowed to EM bond funds, down sharply from the previous week's $1.28 billion.

To blame were "investor worries about heavily indebted peripheral euro zone markets and uncertainty about the willingness of China to sacrifice growth in order to keep prices in check," EPFR said in its report.

Emerging markets bond funds "came under pressure as investors worried about the impact inflation could have on the value of their investments," the report said. "But funds with local currency mandates took in enough new money to compensate for the modest redemptions experienced by hard currency funds as year-to-date inflows climbed to $51.8 billion."

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