Emerging markets rally cools; Petronas bonds widen, Alestra gains; secondary activity mixed

By Aaron Hochman-Zimmerman

New York, Aug. 6 - Emerging markets finally seemed to take a breather from the fierce rally as an August Thursday caught up to investors.

"There were very few trades today," a trader said.

"It is going to get a lot quieter," a strategist said about "the end of every week" in August.

Timing was more the cause of the slowdown than the market sentiment.

"I don't think it's that surprising," the strategist said. "I haven't seen any major selling; it's just August."

Another trader placed the credit or the blame for the slower pace on the external market.

"The broader market is the real input at the moment," he said. "A lot depends on equities."

Also, what happens in September is largely a function of the next few weeks, he said.

If the market takes a break in August, it will return with strength in September, but if the rally regains momentum, then September will grind slower and "depend on supply" levels, he said.

The primary market was quiet on Thursday, but after pricing its mega $4.5 billion deal on Wednesday, Malaysia's Petronas drifted about 10 basis points wider to 152.5 bps.

Meanwhile, Mexico's Alestra SA was seen 4 points higher than its pricing at par Wednesday afternoon.

"Emerging markets are also filling the debt pipeline, so far without dampening investor appetite," EPFR Global said.

"Funds investing in local currency issues again accounted for over half of the net flows into EPFR Global-tracked emerging markets bond funds," EPFR said in a report.

From the major markets, equities softened as volatility numbers were higher by 0.77 to 25.67, according to the VIX index. The index is a common measure of market volatility.

Petronas backs up

Asia remained "pretty busy" while the other sectors dragged through a slowdown in the action, a trader said.

"It's still very strong," he said as the external market held sway.

Despite the overall success, the big deal of the week from Petroliam Nasional Bhd. stumbled off of the blocks.

The five-year sukuk and 10-year conventional bonds, which both priced at Treasuries plus 162.5 bps, were seen wider by nearly 10 bps.

"It was too big a deal, too tight," he said; "It's quite simple."

Even if the deal had been a total of $1.5 billion, "they could have gotten away with the squeeze to the tights," he said, but it was premature to price as tight as it did.

Plus, "$1.5 billion is just a massive sukuk," he said. The conventional bonds were priced at an amount of $3 billion.

"It should trade well eventually," he said, but the bonds will have to suffer through some indigestion.

After a big splash, "it was a bit of a dog, wasn't it?" another trader asked about Petronas.

Asia still strong

The other new bonds in the sector were still performing well even if they were slightly weaker on Thursday.

South Korea's Woori Bank was nearly 5 bps back from its tights as it was quoted at 372 bps bid, 367 bps offered after pricing at Treasuries plus 450 bps on July 27.

South Korea's bonds due 2014 were quoted at 210 bps bid, 195 bps offered on Thursday.

Indonesia's PT Perusahaan Listrik Negara was pulled higher to 100½ bid, 101½ offered on Thursday after pricing at 99.155 on Monday.

Also in Indonesia, industry minister Fahmi Idris met with India trade and industry official Jyotiraditya Scinda along with executives of major Indian firms.

The Indonesian sovereign bonds due 2019 were quoted at 136 bid, 137 offered.

Elsewhere in the Philippines, headline inflation was down in July by 0.2% from 1½% in June 2008, according to a statement from the central bank.

The number brings the appreciation of the peso to its lowest rate since March 1987, the bank said.

The new figure places the average inflation rate at 4.3% and within the target range of 2½% to 4½%.

The bonds were "a bit heavier," the trader said, as the inflation data were "not too much a factor."

The peso was seen trading at 47.805 to the dollar.

The Philippine government bonds due 2030 were spotted at 127 bid, 128 offered.

Alestra strides, LatAm quiets

Latin America registered a healthy session on Thursday but at a calmer more August-like pace, a strategist said.

Alestra was out in front by a long way adding 5 points to its new 11¾% bonds due 2014 after pricing Wednesday at par.

The bonds eased off of the highs, the strategist said, and were spotted late in the day at 104 bid, 104½ offered.

The immediate success "didn't really have the follow-through you'd like to see," another strategist said about Thursday's lackluster session.

Still, overall "I don't think the trends have changed," even though Brazil's five-year CDS was seen at 118 bps.

"Prints like that are raising eyebrows," he said, and investors are forced farther into the curve or simply to become more cautious.

Basically, "the market still looks very healthy," he said, and "there is a bid in the market at any time the market turns lower."

The 11% Brazilian sovereign bonds due 2040 were quoted at 130¾ bid, 131 offered.

In Venezuela, president Hugo Chavez announced his intention to enforce trade embargoes on Colombia as the two continue to spar over the greater U.S. presence in Colombia.

Chavez will stop the sale of 10,000 Colombian cars in Venezuela as well as prevent Colombia's Ecopetrol SA from exploring for oil on Venezuelan territory, reports said.

Also, Chavez plans to add more Russian-built battle tanks to his army's inventory after saying on Wednesday that the actions of Colombia and the United States risk war.

"We're talking about the Yankees, the most aggressive nation in human history," Chavez told reporters.

"The news certainly should not affect the performance of Ecopetrol," the strategist said, "and if it did, I would be a buyer."

The 9¼% Venezuelan bonds due 2027 were lower by 1¼ point to 72½ bid, 73 offered.

The 7 3/8% Colombian bonds due 2019 were quoted at 109½ bid, 110 offered.

Emerging Europe at 'crossroads?'

The rally in emerging Europe may have hit "a crossroads," a London-based trader said, but it was certainly not "the crossroads."

The market was "quieter" than it has been recently and "a little bit more mixed," he said.

It was difficult to pin down the high achievers and underperformers, he said. "I didn't see enough flow."

"We're in that sort of sweet spot of the doldrums," the said.

"There was the massive run-up and now we've reached that 1,000 spot on the S&P [500]," he said, and now the market will likely consolidate.

"[The rally] happens to be in August when it's holiday time anyway," he said, which may allow for consolidation until the desks are fully manned again in September.

The trader himself said that he was about to leave on holiday, but if he remained at work "I wouldn't know what to do anyway."

In Turkey, prime minister Recep Tayyip Erdogan is expected to receive Russia prime minister Vladimir Putin in order to discuss the future of the South Stream pipeline.

Agreements have already been signed by Turkey as well as Austria, Bulgaria, Hungary and Romania to begin work on the competing Nabucco pipeline.

Russia hopes to find Turkish support for the South Stream line, which would travel from Russia underneath the Black Sea out of both Turkey and Ukraine's territorial waters and rejoin Europe in Bulgaria.

The European Union-backed Nabucco line begins in the Caspian Sea region and travels the length of Turkey before reaching Bulgaria.

The Russian government bonds due 2030 fell 5/8 point to 101¼ bid, 101½ offered, while the Turkish sovereign bonds due 2030 dropped 1.6 points to 157 bid, 158 offered.

Also in South Africa, the government will provide ZAR 2.4 billion in economic stimulus funding to train unskilled workers.

The rand was seen trading at 8.065 to the dollar.

Elsewhere in emerging Europe, the Ukrainian bonds due 2016 were quoted at 78 bid, 78½ offered.

On the corporate side, Kazakhstan's KazMunaiGaz bonds due 2015, which priced at 102 on July 28, were seen at 105½ bid, 105¾ offered on Thursday.

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