Emerging markets rides rising equity tide; Argentina leads high-beta charge; rally not enough for primary

By Aaron Hochman-Zimmerman

New York, Nov. 28 - Emerging markets added to the steam it picked up on Tuesday and put market watchers across all of the emerging regions into a better mood.

In keeping with the pattern of the last few months, bonds followed equities as they were better on hope for an interest rate cut prompted by remarks from Federal Reserve Board vice chairman Donald Kohn.

Kohn promised "flexible and pragmatic" decisions to deal with the persistent banking crisis. The statement was widely interpreted as a "dovish statement out of the Fed," a trader specializing in Asia said.

Many investors are expecting at least a 25 basis point rate reduction from the Fed meeting on Dec. 11.

"Nobody knows really," a trader specializing in emerging Europe said about how much of a cut the Fed may provide. "One day this, one day that.

"It's always up and down with inflation and oil and everything," he said about the factors possibly affecting the Fed's decisions.

"You feel the inflation is coming in a little bit," he said referring to the dollar.

In trading, the high-betas were back on top again with Argentina climbing the highest. Its discount bonds due 2033 swelled by 2.3 during Wednesday's session.

The primary market showed barely a flicker of light, but "there's a ton of money which needs to get issued," the Asia trader said.

With a stretch of a few solid days "we'll definitely see issues come to market," he said.

A trader of Latin American credits was still skeptical of the rally's ability to sustain itself.

"It's been kind of crummy," the trader said, adding: "Good today."

When asked what may be driving the highs and lows over the recent sessions, the frustrated trader said: "I don't know; I don't want to venture a guess anymore."

"I think we're probably in for a little more volatility," the trader said about the near-term outlook.

With climbing equities, volatility was able to lose 2.17 as the VIX index ended the day at 24.11. The index is the commonly used gauge of market volatility.

Emerging markets as a sector spent the day tightening. JP Morgan's EMBI+ index shed 14 bps to a spread of 251 bps. The EMBI+ calculates the amount of extra yield investors require to hold emerging markets debt.

LatAm rallying, high-betas outperform

Latin America spent the day in the sun with what one syndicate official called "a very strong rally."

"The high-beta products are outperforming the market," he said.

Argentina's 8.28% discount bonds due 2033 jumped up 2.3 to trade at 94.5 bid, 95 offered.

Due to the strength in the market over the last two days a trader said: "I bet you tomorrow [Thursday] Venezuela and Argentina will be up again."

In Venezuela, president Hugo Chavez accused CNN of promoting his assassination. The accusation was prompted by a production error by CNN's Spanish language broadcast which accidentally displayed a caption reading: "Who killed him?" during a piece about Chavez rather than the recently murdered American football star Sean Taylor.

CNN promised to broadcast a series of corrections.

Also, Venezuelans will vote on Sunday for a referendum which would give Chavez increased powers over the central bank and greater control over the countries oil production business.

Although Chavez has expressed confidence, many feel a victory for the president is far from assured.

Questions over the outcome of the referendum have pushed investors away from the Venezuelan credits, a syndicate official said.

Nonetheless, in trading Wednesday the Venezuelan 9.25% bonds due 2027 tightened approximately 20 bps and traded 0.75 higher at a bid of 97.75.

PDVSA's 5.25% notes due 2017 were down, trading at 67.5 bid, 68 offered.

Meanwhile, in the European Union some are beginning to ask for a ban on beef produced in Brazil over fears of foot-and-mouth disease.

Peter Kendall of the British National Farmers Union told the union members that research and record keeping concerning the health of Brazilian cattle was not up to standards, the BBC reported.

Brazilian cattle companies were given until the end of 2007 to improve before the European Union will decide on whether to impose an import ban.

If there is a ban "it would probably be a specific state," a said a trader who specializes in Latin American corporates.

"They've never banned the beef from the whole country," the trader said.

The Friboi 9.375% notes due 2011 traded at 100.5 bid, 101.25 offered.

The Bertin 10.25% notes due 2016 traded at 101.75 bid, 102.5 offered.

The Marfrig 9.625% notes due 2016 traded at 101.5 bid, 102.5 offered.

Brazil's 11% government bonds due 2040 jumped 1.05 to a bid of 113.3, while the issue due 2037 traded at a bid of 112.3, higher by 1.35.

Asia 'adding back risk'

A trader of Asian credit called the day's session "a complete turnaround."

Investors were "adding back risk for the first time in weeks," he said.

The Fed comments which spurred the equity rally took bond prices along for the ride.

In the Philippines, president Gloria Macapagal Arroyo has established a committee to review accusations by a United Nations investigator of the torture and murder of dissidents since 2001.

The UN's Phillip Alston filed a report which the Arroyo administration called a repeat of the findings published in February.

The military was implicated in the killings, but a spokesman said that those who died were killed as part of a purge of communists.

The benchmark Filipino sovereigns due 2030 added 1 point to trade at 132.5 bid, 133 offered.

Indonesia's sovereign bonds due 2017 were seen up 0.25 to trade around 103 bid, 103.5 offered.

Pakistan's president Pervez Musharraf tearfully resigned from the army and passed command to his widely respected ally Gen. Ashfaq Pervez Kayani.

Musharraf is expected to begin a term as a civilian president on Thursday, although some in the opposition, such as former prime minister Benazir Bhutto, are still not satisfied with Musharraf's leadership.

A market source believes the state of emergency, imposed on Nov. 3, will be lifted "very soon" and certainly ahead of the January elections.

Pakistan's government bonds due 2017 added 3 points to trade at approximately 88 bid, 90 offered.

Emerging Europe sells on slight lift

Market watchers in emerging Europe saw "some selling" Wednesday as strength built in the sector.

"Any movement up and they want to sell," a trader said.

"It has to go up two or three days and they want to sell, otherwise they are still suspicious," he said.

Ukraine's minister of economy Anatoly Kinakh told the Itar-Tass News Agency that Ukrainian industry will suffer from the high price of oil if nothing is done to alleviate the burden.

Kinakh noted that approximately 70% of the oil exported from Russia to the European Union travels through pipelines in the Ukraine, and therefore his country should benefit not suffer from rising oil prices.

Light sweet crude was seen trading at $91.50 per barrel.

Russia's benchmark government bonds due 2030 were seen 0.25 higher trading at 113.25 bid, 113.4 offered.

As E.U. officials met with Chinese president Hu Jintao to discuss the trade imbalance between them, Turkey's Arzuhan Dogan Yalcindag, chairwoman of the Turkish Industrialists' and Businessmen's Association met with Dong Songgen, vice chairman of the China Council in Beijing to lay the groundwork for a new trade agreement between the two countries.

Trade between the two in 2006 was $8.1 billion, which was up from $4.8 billion in 2005 and $3.4 billion in 2004, the Anatolia News Agency reported.

"The consumption habits of the Chinese will be a key factor for the world economy. Turkey would love to be active in this process," Yalcindag told the news agency.

China is Turkey's seventh largest trading partner.

The Turkish sovereign bonds due 2030 were seen up 0.75 to trade around 156.75 bid, 157.15 offered.

No wind in primary sails

The primary spent another day trying to sail through the doldrums.

Some in the market hold out hope for a slight opening in the pipeline if the market can sustain a solid performance for a few sessions in a row, but nothing on Wednesday made issuers or investors bold enough to try to complete a deal.

There is a rumor of a retap of the Venezuelan bond due 2038 as well as a new issue from PDVSA, a syndicate official said.

The potential for a large amount of "supply coming out of Venezuela is a concern," he said.

© 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.