Emerging markets ends week strong; skepticism about future remains; primary produces new issues

By Aaron Hochman-Zimmerman

New York, Sept. 21 - Emerging markets ended the week with a better tone and more conviction, but the week overall felt like a tug-o-war between rally and disappointment in response to the Federal Reserve's rate cut.

Most agreed that the rate reduction was a positive or at least necessary move by the Fed, but it did not cause the champagne corks to fly across emerging market trading desks.

However activity was better.

"We've had some pretty good two-way flow," an emerging markets trader said.

Many investors still could not make up their own minds about market sentiment.

"Broad brush, the markets are better," another emerging markets trader said, but admitted that there is a lot about the markets that is still in doubt.

"The markets are in charge," he said. "In some ways that's satisfying; in some ways that scares the life out of me."

In the short term, the Fed's action improved prices around the emerging markets, but the trader wondered what effect the rate reduction will have in the long-term.

"I'm not sure if that's good news for my kids, but it's good for me as a trader," he said.

"The cut heartened me; it made me more bullish, but ... some of the basics we know and love just don't exist anymore," the trader said about how markets have behaved in recent months.

The trader said that the Fed cut and the Northern Rock bailout proves governments, even the world's strongest in the United States and United Kingdom, only have so much control over the market.

"The market's a beast; it gets what it wants," he added.

Another market source said the state of the credit markets and the recent poor economic indicators show that a market slowdown is already here.

Still the stutter may only last until the end of the year, the source said.

Friday, the market was helped by a strong drop in volatility. The VIX index which measures market volatility fell 1.45 to end at an even 19.00.

As a sector, emerging markets was flat, finishing Friday with a spread of 194 bps on JP Morgan's EMBI+ index, a measure of the amount of yield investors require to hold emerging markets credit.

Europe holds still

Emerging Europe held its safe positions at the end of a week that some had expected would be a watershed of improvement. Like most issues, the benchmark European sovereigns showed little interest in either the rate cut dominating the U.S. headlines or the Bank of England bailout dominating the U.K. news.

In Russia, a cabinet shake up to include a new prime minister, Viktor Zubkov who was formerly tasked to fix economic corruption, and a promise from president Vladimir Putin to support the solvency of Russian banks, did little to move that country's sovereigns.

Russian bonds due 2010 ended Friday's session flat at 103.25 bid, 103.375 offered. The benchmark issue due 2030 finished down approximately 0.25 to end at 111.75 bid, 111.875 offered.

In Turkey, with inflation concerns as a backdrop, the benchmark sovereigns due 2030 ended up approximately 0.25 to close the day at 155.50 bid, 155.625 offered.

Since the July elections, the Turkish political situation looks stable, a market source said.

The larger picture in Turkey looks positive, but the country's greatest weakness is based on its manufacturers' reliance on exporting rather than on domestic demand, the source added.

LatAm strong after midweek pause

Latin America saw improvement won over confusion, especially in the traditional high-beta credits, as the dust settled from a week full of debate about the market's pace and direction.

"I think it went well," Enrique Alvarez, a debt strategist at thinktank IDEAglobal, said about the headline heavy week.

Spread levels contracted 32 bps and that is more than enough of a reason to say it was a strong week, he said.

"There hasn't been a lot of volatility attached to the category," he added.

Brazil is still favored by many investors although talk about inflation and higher commodity prices, particularly oil, weighs on its sovereigns.

Inflation was up 0.29% in September, but that was less than the 0.42% increase in August, and below the 0.40% that had been predicted for September, according to a market source.

In August lower food and fuel prices contributed to the easing inflation.

Brazil's celebrity 11% notes due 2040 were seen trading at 133.45 bid, 133.55 offered, up from 132.60 on Thursday.

"Argentina was firmly to the upside," Alvarez added.

The high-beta 8.28% sovereigns due 2033 were seen trading at 93.95, up from Thursday's 90.25 close. Argentina's discount rate notes traded at 92.55.

Argentina will offer its third installment of its Bono del Sur Monday with Venezuela.

The Venezuelan 9.25% notes due 2027 showed healthy gains as well.

The bonds were up approximately 1.75 to 105.50 bid, 105.75 offered.

Asia tighter on the week

Asia has tried with some success to separate itself from the credit crunch spanning the Atlantic.

This week investment grade, high yield and sovereigns have tightened in by 5 bps, 37 bps, and 40 bps respectively, a market source said.

However, China has run into some internal problems of its own, according to another market source.

High food prices spurred by poor harvests this year along with high worldwide commodity prices are taking a toll, and may force an interest rate hike, the market source said.

CPI inflation is also on the rise. An increase of 4.8% is projected for 2007, which is over 200% greater than the 1.5% CPI inflation posted last year.

The Philippines' tax collection revenue grew 15% to 20% July through August this year. In the first half of 2007 the collection rate only managed 5% growth, according to the market source.

Strong showings also came in from the national and state governments and the social security system which all registered surpluses in the first quarter this year, the source added.

The Philippines sovereigns due 2025 were trading at 113.25 bid, 114.00 offered. The sovereigns due 2033 traded at 130.00 bid, 130.40 offered.

Meanwhile, Indonesia's benchmark notes due 2017 were seen trading at 104.30 bid, 105.20 offered, up 0.05 from Thursday's close.

Inflation in Africa's shadow

Africa is known for excesses of political risks beyond that of many other emerging market nations.

Even in stable stand-out South Africa, president Thabo Mbeki is expected not to be re-elected this December, according to an analyst who specializes in South Africa.

South Africa has shown consistent economic growth and only light exposure to the global credit crunch, the analyst said.

On the negative side, inflation in the country has slowed but still weighs on the economy, another market source said, adding that a marked slowdown in inflation is unlikely within the coming year.

The country has demonstrated its ability to behave as a true emerging market as traditionally strong contributors to the GDP, agriculture and mining, have trailed off in favor of more developed industries such as manufacturing and construction, the analyst said.

Elsewhere in Africa, another market source recommended a "buy and hold" strategy in Zambia.

Long-term yields are headed down as investors try to lengthen their duration, the source said.

In Tanzania, with inflation relatively contained, sovereigns there continue to look "more attractive," the source added.

Primary wakes up

In the primary market, two deals managed to price as a long-slumbering primary proved it has life.

Rede Empresas de Energia Eletrica SA priced at par a $175 million add-on (B3/-/B) to its $400 million 11 1/8% notes sold on March 28.

The senior unsecured perpetual bonds are callable at par beginning in 2012.

The Sao Paulo-based issuer generates and distributes electrical power.

The notes were seen trading a little higher at 100.50 bid, 101.00 offered.

Hong Long Holdings Ltd. priced $90 million of five-year notes with warrants at par to yield 12½%.

The notes carried a coupon of 12½% and warrants for 81 million shares, 7.25% of the company's equity.

The deal priced in line with talk on Sept. 20, but the offer was downsized from $100 million.

Citigroup was the bookrunner for the deal.

The notes are due Oct. 3, 2012 and are call protected until Oct. 3, 2010.

Proceeds will be used for property development and the repayment of existing debt.

In late July, Hong Long was unable to price a proposed $175 to $200 million five- to seven-year offer through Citigroup.

Hong Long is a Shenzhen, China-based property developer.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.