Selling in EM to square balance sheets; only big move is Argentina's loss; primary hibernates

By Aaron Hochman-Zimmerman

New York, Dec. 14 - Despite some headline sparks, emerging markets did not offer the volume to cause much change in the sector's landscape.

The "very negative price action in U.S. equities didn't translate into spread widening at all," a syndicate official said.

Prices were stable to slightly lower, except for Argentina, which reacted poorly to an announcement that the country will not restructure any debt in the coming year. The discount bonds due 2033 fell almost 1.25.

The primary, which had been filled with rumors of local-currency deals earlier in the week, took a sick day and started the weekend early.

"You're mostly set for the rest of the year," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Because of low pre-holiday volumes, prices and spreads "are not being pushed by the weakness in U.S equities," he said.

"Volatility is going to be on the table next week," a buysider said, which will keep volumes low.

The subprime troubles have not been resolved and there is still more to come, he said.

A trader agreed: "I think the market's going to hold out next week," he said.

"The big question is the decoupling of emerging [markets], if it actually materializes or not," the buysider said.

Equities were hurt and volatility climbed towards the end of trading by 0.71 to close at 23.27, according to the VIX index. The index is the generally accepted yardstick of market volatility.

Despite the drop-off in equities "Treasuries didn't really rally that much," a buysider said.

Emerging markets was able to tighten by 3 basis points to a spread of 222 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to keep money in emerging markets debt.

LatAm lower and slower

"It's a hold market right now," said IDEAglobal's Alvarez.

Although there has been news that could potentially affect bond prices, there has only been a reaction to "a very limited degree because of the illiquidity in the market right now," he said.

Still there has been "a slight price retreat," he said.

"Most players are just happy to ride the success of Brazil and Colombia," he said.

Despite the eventual expiration of the tax which accounted for 10% of Brazil's revenue, the light trading in the market and the overall strength of Brazil's credits left them almost unchanged on the session.

Brazil's bonds due 2037 were lower by 0.05 to 113.1 bid, 113.8 offered. The 11% bonds due 2040 were seen lower by 0.15 to trade at 133.6 bid, 133.65 offered.

"Nice and tight," a trader said.

Also, with the stronger dollar, "some of the other currencies got a little weaker," a buyside source said.

"The real moved probably more than we are used to," he said.

The real was seen trading down at 1.79 to the dollar.

Colombia's 7.375% sovereigns due 2037 were quoted lower by 0.25 at 112.1 bid, 112.6 offered.

In Argentina, the announcement on Thursday by economy minister Martin Lousteau that there would be no restructuring of bond debt in 2008 and likely none in 2009, was behind the drop in prices, according to Alvarez.

"That pushed prices down yesterday and it is still doing it today," he said on Friday.

The announcement, Alvarez said, "was sort of unexpected."

The inauguration of Cristina Kirchner was cause for hope that some policies might have changed, Alvarez said.

The 8.28% discount bonds due 2033 led the losers as they shed about 1.25 to trade at 95.6 bid, 96.05 offered.

Venezuela announced that it will provide $4.5 billion to build an oil refinery in Brazil to be completed in 2010.

The joint venture will be 40% owned by Venezuela's PDVSA and 60% owned by Brazil's state-run oil firm Petrobras.

"PDVSA is all over place except where it's supposed to be, in Venezuela," Alvarez said.

Each time resources are expended on foreign investments, domestic concerns are sacrificed, he said.

Venezuela's 9.25% bonds due 2027 fell by 0.5 to 99.5 bid, 100.25 offered.

Slight selling in emerging Europe

Prices in emerging Europe were flat to slightly lower even though there was some selling on the "very low volumes" by investors who were "cleaning up accounts," a trader said.

Even though there have been some recent developments in the market, "people just say it's finished," he said, as he stepped away from his office's Christmas party.

In Turkey, the central bank will make an attempt to reach its target inflation rate of 4% next year, a market source said.

The number was reached by an agreement attached to a $10 billion loan from the International Monetary Fund.

Turkey missed this year's inflation goal and is likely to miss next year's as well, the source said.

The lira is up more than 7% against the dollar since it cut rates in September and although more easing is expected, the easing period will probably not last longer than the early part of 2008, the source said.

The lira was seen at 1.712 against the dollar.

The Turkish government bonds due 2030 were off by 0.3 to trade at 157.2 bid, 157.7 offered.

Russia has given the government of Belarus a stabilization credit of $1.5 billion for 15 years with a grace period of five years, according to the Itar-Tass News Agency.

The Russian sovereign bonds due 2030 lost 0.1 to trade at approximately 113.4 bid, 113.85 offered.

Quiet Asia ready for 2008

Asia's market was subject to light volumes as only investors "trying to square positions" before the end of the year were willing to make any moves, a buyside source said.

In the Philippines, remittances from Filipino workers overseas hit a record high of $1.4 billion in October, according to a statement from the Central Bank of the Philippines.

The inflows increased by 17.1% from the totals of the same period in 2006. The year-to-date totals now stand at $11.9 billion, which is 15.2% higher than at the same point in 2006.

The Filipino bonds due 2030 were seen unchanged at 134.5 bid, 135 offered.

Indonesia's sovereigns due 2017 were off by 0.5 to trade at approximately 103.5 bid, 104 offered.

In Pakistan president Pervez Musharraf issued an ordinance, which if approved by the parliament, would give him control of the country's nuclear weapons.

Although the military claims its nuclear security is "foolproof," many are concerned about Islamic militants gaining control of the arsenal.

Currently the prime minister's office has control of the nuclear weapons.

The Pakistani government bonds due 2017 were quoted at 91 bid, 92.25 offered. The bonds due 2016 were seen at 92.5 bid, 93.75.

Also in Asia, the Asian Development Bank will provide $1.1 billion in financing to a 151 mile road from Hanoi, Vietnam to Kunming, China.

The highway will be the largest financing project in ADB history, a press release said.

The current network of roads makes the journey two days for cars and three days for trucks.

After the project is finished in 2012, the time will be cut to one day.

Primary not stirring

With only 11 shopping days until Christmas, the primary already felt dark and locked down for the season.

There were rumors of a $500 million local deal from Venezuela, but "I don't expect them to even try," a buysider said.

"There's no market right now for anything," he said.

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