Emerging markets up slightly with equities; investors watch earnings; primary rolls out new issues

By Aaron Hochman-Zimmerman

New York, Oct. 23 - Emerging markets again refused to pick a direction early, but finally found its way to a mildly narrower close on a day of light trading.

Prices followed U.S. equities to a slight gain, with spreads generally 5 basis points tighter.

"The market is in good technical shape," said Jefferies & Co. head of emerging markets, Eric Bauer-Rowe.

We have not seen the sell-off some had been expecting, he said.

"I would say people are waiting to see if there's any new issue business," he said.

By the end of the day the primary was able to produce developments on a few new issues.

Talk was set in the 8 7/8% area for Colombian Empresa de Energia de Bogota's $500 million to $710 million deal and attracted most of the market attention, but two $100 million deals were brought forward from Latin America as well.

In trading, none of the usual high-beta suspects were able to distinguish themselves as the day's biggest mover, but Panama's sovereign due 2036 saw more action than normal as it tightened 7 bps, Bauer-Rowe said.

Investors watched equity numbers and earnings reports influence the market, according to a syndicate official.

Looking ahead, Merrill Lynch's earnings report scheduled for Wednesday may be able to move the market, he said.

On what the official called a "directionless" day, volatility managed to drop off 1.23 according to the VIX index. The index which is the standard measure of market volatility closed the session at 20.41.

Creeping optimism in emerging markets was reflected in JP Morgan's EMBI+ index. It narrowed 4 bps to end the day at 204 bps. The index measures the amount of extra yield investors demand to hold money in emerging markets debt.

Primary talks one, introduces two

In new issue activity, Colombia's Empresa de Energia de Bogota released talk in the 8 7/8% area for its upcoming $500 million to $710 million offering of seven-year senior unsecured bonds (/BB/BB).

ABN Amro will act as bookrunner for the deal.

Proceeds will be used to refinance existing debt.

EEB is a Bogota, Colombia-based producer and distributor of electricity.

The books were many times oversubscribed, a market source said.

Brazil's Banco Mercantil do Brasil SA plans to offer $100 million three-year bonds (Ba2/B/).

UBS will take the books for the issue.

Banco Mercantil is a Sao Paulo-based retail and commercial bank.

Panama Canal Railway Co. announced plans to issue $100 million 19-year senior secured notes.

Morgan Stanley will bring the deal to market.

The bonds will have an average life of 14 years and are noncallable except for a make-whole call.

Proceeds from the sale will be used to repay existing debt.

Panama Canal Railway in an Ancon, Panama-based rolling stock operator.

Europe stable, above politics

European emerging markets trading was light although some had expected more market influence from the developments in Turkey.

Turkey has come closer to calming the flames which have been fanned from across the Iraqi border by the Kurdistan Workers Party (PKK).

After a series of negotiations the Iraqi government intends to close PKK offices and prevent its operation from Iraqi territory.

Turkey still insists it will attempt further diplomacy to stop cross-boarder attacks by the Kurdish rebels.

Prime minister Recep Tayyip Erdogan discussed the idea of sanctions on exports to Iraq, but did not rule out military action.

Turkey's sovereign issue due 2030 was seen up 0.375 to trade around 156.

Elsewhere, elections in Poland went in accordance with the latest opinion polls sending out current prime minister Jaroslaw Kaczynski, even though he had actually called the elections early with the intention of consolidating power.

As incoming prime minister Donald Tusk celebrated his party's victory, Polish 10-year credit default swaps were weaker, said a strategist who specializes in eastern Europe, but "inflation is up again."

"It is likely to lead to some policy tightening down the road, that is why the bond market cannot rally," he said.

Still, countries such as Poland and the Czech Republic are doing quite well in this environment, he said.

"Liquidity is still there, investors are still putting cash into these markets, but they are being selective," he said.

LatAm slightly tighter

Latin America was lethargic to began the trading day, but found its way tighter by the end of the session with some of the less-followed issues like Peru and El Salvador "fairly well bid," Jefferies' Bauer-Rowe said.

Even Panama saw its government bond due 2036 tighten by 7 bps despite the news of new supply in the shape of the $100 million deal from Panama Canal Railway Co.

In Argentina, the sovereigns held steady before the anticipated presidential elections Wednesday which are expected to give the presidency to senator and first lady Cristina Fernández de Kirchner.

Volatility is not expected to leave Argentina behind after the elections, but no additional fluctuations are expected as the votes come in, a market source said.

The high-beta 8.28% government bonds due 2033 were spotted unchanged and trading at 94.

Brazil's bonds also spent the day spinning gears, but driving nowhere.

Even as the real was firm, bonds showed no motivation to break higher with U.S. equities.

The Brazilian sovereigns due 2037 registered no change and were quoted at 114.75.

The real made slight gains to end at 1.793 to the dollar.

Venezuela, still benefiting from $85 per barrel oil prices, saw its 9.25% sovereign due 2027 rise by 0.5 to trade around 107.25 bid, 107.5 offered.

Asian prices waiting for catalyst

Asian trading made little changes on its own. Issues there were also closely locked with U.S. equities, but like in other sectors, some found themselves trading narrower at the day's close.

In the Philippines bond prices were up on moves by the central bank to restrict lending.

A trader spotted the Philippine sovereigns due 2030 at 133.25 bid, 134.125 offered.

Elsewhere in Asia, Indonesia's government bonds due 2017 were quoted at 105.5 bid, 106 offered.

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