Russia flat on PM shake-up; more politics than trades in Latin America; primary silent

By Aaron Hochman-Zimmerman

New York, Sept. 12 - Emerging markets continue to hold flat and find excuses to wait for more economic data and the highly anticipated U.S. rate reduction.

Overall, emerging markets is still outperforming other sectors, even in the face of drying liquidity and sell offs, a market source said.

Emerging market fundamentals look healthy along with a generally limited need for external financing of sovereigns, the source added.

Despite the positives, negative headlines and data have sent investors into a defensive posture which many see as likely to hold until 2008.

Another market source called on the Federal Reserve Bank to ease lending rates, even as much as 100 basis points and beyond, by the end of the year.

If not for the drastic slashing, the United States will face "significant" economic hardship, the source said.

That hardship comes as the dollar faces historical lows. The dollar was seen trading at 1.3904 to the euro and 2.0314 to the pound.

On a more optimistic note, a trader said that the worst may be behind emerging markets, but acknowledged the problems that still persist.

"The corporate market still felt heavy," he commented.

Nonetheless, emerging markets had a strong day relative to Treasuries. The JP Morgan EMBI+ index narrowed 5 bps to end at 233 bps as investors accepted less yield for emerging markets risk versus U.S. Treasuries.

Russian bombs and duds

Not even the bombshell dismissal of the Russia's prime minister Mikhail Fradkov and his government or the test-detonation of what is reportedly the world's most powerful non-nuclear device could make much of an impact on emerging markets.

"Nothing at all," a trader said about the impact from the news.

"It's a shame really," the trader said, comparing it to Boris Yeltsin's presidency when the market reacted strongly to the Russian government's moves.

President Vladimir Putin's choice of replacement prime minister, Viktor Zubkov, head of Russia's Federal Financial Monitoring Service, is evidence of a power-struggle between "clans" in the Kremlin based on feelings toward the west, the BBC reported.

Zubkov's likely approval by the Duma still failed to produce any serious enthusiasm in the market in either direction.

The trader saw Russia's sovereigns due 2030 trading at 111 15/16, up slightly from Tuesday's 111 7/8 close.

In Russian corporates there has been good news, the trader said.

Positive earnings have been released by Vimpelcom and Severstal Steel, but "the overriding fear is way, way, way more important than any glimmer of light," the trader said.

"There has been great news in the level of car sales," he added.

The highly liquid Russian corporates Gazprom and VTB are holding well against the Russian sovereign, a market source said.

In Kazakhstan banks showed signs of recovery over the last few of weeks on a mixture of short covering and real buying from oversold conditions, according to a market source.

Kazkommertsbank and Bank TuranAlem CDS have narrowed about 25 bps.

Also in Europe, Turkey's sovereigns due 2030 were seen trading flat to about 1/8 up from their open.

The Turkish lira gained on the dollar and was seen trading at 1.271.

Argentina disappoints

Latin America is holding on through the credit crisis with sufficient liquidity, a market source said.

A number of issuers were able to refinance and pay down debt before the crisis set in. Now many Latin American corporates have stronger balance sheets than ever before, the source said.

Argentina has proved to be somewhat of an exception.

Corporates from that country are underachieving compared to other Latin American issues, a market source said.

Some sellside proprietary investors have been bottom-fishing, but the lack of hedge fund interest may have scared off other investors, the source said.

Autopistas Del Sol, Trasportadora de Gas del Sur (TGS), Hidroelectrica Piedra del Aguila have all seen their yields rise due to lack of interest in recent weeks, the source said.

Transener has underperformed the sovereign by about 50 bps, he added.

Venezuela legislature approves fiscal reforms

Encouraged by president Hugo Chavez, Venezuela's assembly passed a series of economic and political reforms Wednesday.

The BBC reported that the measures which passed include a maximum six-hour work day, and increased executive control over the central bank and private companies. Chavez also extended presidential terms of service from six to seven years, and abolished term limits.

Dedicated money continues to buy PDVSA cash bonds, but local supply is keeping spreads 100 to 125 bps behind the sovereign, depending on the point in the curve, a market source said.

Meanwhile, ConocoPhillips and ExxonMobil continue to seek to recover money from the Venezuelan government after the American oil companies were forced to surrender interests to the national oil firm PDVSA.

Mexico and Brazil trading flat

In Mexico, the government's 10-year peso sovereign bond was seen trading near 101.55 Wednesday. The notes' yield dropped 5 bps to 7.74%.

The gains came as the lower house of the Mexican congress approved a minimum income tax on companies to improve infrastructure.

President Felipe Calderon did pledge throughout his campaign to improve living conditions in his poverty-stricken country, according to a market source.

Still, the Mexican Finance Ministry lowered the 2007 estimate of economic growth to 3% from 3.3%, the source said.

The decrease is likely related to spill-over damage from the U.S. housing and credit markets.

The United States buys approximately 80% of Mexico's exports, the source said. Hence investors will likely be watching release of U.S. retail sales numbers, expected this Friday.

Brazil's frequently traded 11% notes due 2040 were seen at 132.7, just off Tuesday's close.

Brazil's bonds continue to hold, but inflation concerns exist as Brazil's economy continues to quickly grow.

According to recently released figures, Brazil's economy grew 5.4% in second quarter as compared with the second quarter of 2006.

South Africa bonds weak, rand stronger

South Africa is facing possible trouble because of weaknesses in foreign direct investment, a market source said.

The trend has not yet been severe, but more negative headlines from the United States may start to weigh on South Africa.

Among the country's key sovereign, the R153 was seen around 9.34%, slightly improved from its close Tuesday at 9.36%. The long-term R157 edged better to 8.68% to 8.70%.

The rand itself gained to its highest point ever against the falling dollar. It was bid at 7.15 from its close at 7.16.

Asia holding steady

In Asian markets, including investment grade, the landscape has become more challenging over the months the world has faced the current credit crunch, according to a market source.

However, a market source considers some corporate issues to be solid.

AES China, China Fishery, and PT Berau Coal have been stand-outs, the source said.

In South Korea, computer chip manufacturer MagnaChip Semiconductor Ltd.'s 8% notes due 2014 were seen by a trader down 1 point at 62 bid, 64 offered. The company's 6 7/8% notes due 2011 were off ½ point at 77.5 bid, 79.5 offered.

Primary quiet after busy Tuesday

The primary market stayed quiet after a relatively - but only relatively - exciting day Tuesday.

Investors are still awaiting terms from Hong Long Holdings, which is looking to sell $100 million in senior notes with warrants attached. Guidance for the issue has been set at 12½%.

Ever present in the primary market is the volatility which managed to drop slightly on the day by 0.31 to end at 24.96.

"We'll wait for Friday," a trader said referring to the release of economic data such at U.S. retail sales and industrial production.

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