Emerging markets lose post-Fed gains; prices mixed; primary shut down

By Aaron Hochman-Zimmerman

New York, Jan. 30 - Emerging markets were boosted by the 50 basis point cut from the Federal Open Market Committee, but the rally faded by the day's end.

"[The cut] was more or less in line with expectations," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Initially, [there was a] very favorable reaction," a trader said, "But enthusiasm dissipated as the U.S. equity rally waned."

Prices finished mixed as "flows continue to be fairly illiquid," a strategist said. "The market is giving back all its gains."

"There was a good reaction by the high-betas," he said, yet "the long end of the curve is suffering the same as Treasuries."

The lowered rates are only a temporary solution, but at least the cut shows the Fed's bias toward easing, he said.

Trading produced few standout performances, but Colombia's sovereigns due 2037 were seen up 1.3 points.

Volatility tracked up slowly until the announcement of the rate reduction, when the VIX index plummeted then climbed back to close higher by 0.3 at 27.62. The index is a commonly used gauge of market volatility.

As investors moved away from Treasuries, emerging markets were given a chance to tighten, but early gains were lost by the close. JPMorgan's EMBI+ index, which was as tight as 256 bps, finished tighter by only 2 bps to close at 268 bps. The EMBI+ calculates the amount of extra yield investors will require to keep money in emerging markets debt.

Emerging Europe jumps, lands flat

Trading in emerging Europe was light as investors anticipated the Fed's move in what is an already illiquid environment.

After the rate reduction was announced prices jumped with equities but managed to sink back to the morning's levels as the day ended.

A Credit Suisse report predicted the yield curves in Turkey, Brazil and Colombia will flatten out as the sputtering global economy will ease inflation, according to a report in the Turkish Daily News.

The Turkish sovereigns due 2030 lost 0.1 and were spotted trading near 156.55 bid, 157.05 offered.

Russia currently holds a cash reserve fund of $127 billion and a national wealth fund of $32 billion, first deputy prime minister and finance minister Alexei Kudrin said, according to the Itar-Tass News Agency.

The overall reserves, including gold and foreign exchange, will soon grow to $470 billion, he said.

Also, president Vladimir Putin asked the Federal Security Service (FSB) to monitor economic security.

The agency, which is loosely a successor to the KGB, will combat fraud and abuses of office as Russia's economy continues to grow, Putin said.

The Russian sovereign bonds due 2030 fell 0.25 to trade at 114.875 bid, 115 offered.

The Ukraine and NATO agreed to greater levels of cooperation on Wednesday, as secretary-general Jaap de Hoop Scheffer met with prime minister Yulia Timoshenko in Kiev.

The Ukrainian government bonds due 2016 dropped 0.5 to 99.875 bid, 100.6 offered.

Also, South Africa continues to experience power outages that have at times shut down heavy industry and mining, according to a market source.

The lack of capacity has more to do with underinvestment than excessive demand, the source said.

The state power company Eskom plans a 300 billion rand investment over the next five years, but outages are still expected for the next five to seven years, the source said.

The cost of the strain on the power structure is likely to be passed along to customers, which may spur higher inflation, the source added.

The South African bonds due 2017 were quoted at 121.5 bid.

In corporates, Kazakhstan's Bank CenterCredit will sell a 30% stake to South Korea's Kookmin Bank, according to a market source.

"Every bank is trying to raise money," a syndicate source said.

Kookmin will reportedly pay $630 million for the share with the option to buy an additional 20.1% stake in three years.

CenterCredit's issues due 2014 were spotted at 90.5 bid, 91.5 offered and tighter by an approximate 250 bps.

LatAm up slightly on cut, as expected

Latin American trading was slow and leaning away from risk ahead of the Fed decision, a market source said. After the rate cut, the tone was brighter.

"It's pretty positive," IDEAglobal's Alvarez said, although most of the cut was already priced in.

"Bids were a tad better," he said.

If there were any, the outperformers were from the long end of Colombia's curve or the Venezuela bonds due 2027, he said.

The Colombian 7.375% issues due 2037 were seen up 1.3 to 107.5 bid.

Venezuela's 9.25% bonds due 2027 rode the rate cut to a gain of 0.75 to trade at approximately 101.75 bid, 102.25 offered.

Fellow high-beta Argentina saw its 8.28% discount bonds due 2033 take on 0.5 to trade at 93 bid, 93.3 offered.

In Brazil, the European Union will bar the import of the country's beef over safety concerns beginning on Feb. 1, a market source said.

Issues were first raised over the health of Brazilian cattle in December when the E.U. banned beef from certain states.

"Brazilian beef got hit following the news, but rallied just before the FOMC announcement, to close virtually unchanged on the day," a trader said.

The Friboi 9.375% notes due 2011 were spotted at 96 bid, 97 offered.

The Marfrig 9.625% notes due 2016 were quoted at 95.75 bid, 96.75 offered.

The ban will only marginally affect profits of the major beef producers, a source said.

Brazil's 11% bonds due 2040 were up by 0.1 to trade at 134.25 bid, 134.35 offered. The 7.125% bonds due 2037 added 0.5 to trade at 109.5 bid, 109.75 offered.

"Brazil still constitutes a very favorable value against the high-betas," Alvarez said.

Asia ends flat to mixed

Asia began the session coming off of heavy volumes from overnight trading, which brought spreads wider, a market source said.

As in the other sectors, the Fed delivered a bit of tightening, but issues were flat to mixed by the session's close.

In the Philippines, the central bank asked the finance department to pare down the country's foreign debt, according to a report in the Manila Times.

The central bank's request came as the $500 million reopening of the bonds due 2032 was sold on the international market on Tuesday.

The bank would prefer internal borrowing to preserve the success of the peso, which it called Asia's best-performing currency.

The peso was seen trading up by 0.1 at 40.25 to the dollar.

The Philippine government bonds due 2030 gained 0.25 to trade at approximately 132.5 bid, 133 offered.

In Indonesia, banking sector lending is expected to expand by 22% in 2008, compared to a 21% rise in 2007, the Jakarta Post reported.

The Bank Indonesia interest rate was lowered by 175 bps to 8% in December.

The Indonesian bonds due 2018 were up 0.125 to 103.25 bid.

Pakistan's former chief justice, Iftikhar Mohammed Chaudhry accused president Pervez Musharraf of being an "extremist general."

Chaudhry was fired and placed under house arrest when rioting led to the declaration of emergency rule in November.

Primary closes up

The emerging markets primary was quiet as investors were still digesting the results of the rate cut.

"I haven't seen anything," a strategist said about any potential new deals.

A syndicate desk official indicated that only a sovereign or near-sovereign would be able to issue new paper.

"People are still watching payrolls on Friday," the syndicate official said.

Latin American issuers such as Grupo M Holdings SA, Net Servicios de Comunicacao and Empresa de Telecom de Bogota still have deals lingering on the calendar.

Still, when asked if any of these deals are expected in the near-term IDEAglobal's Alvarez said: "I would think not."

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