Emerging Debt-Iraq uncertainty pressures Brazil, market

www.forbes.com Reuters, 01.24.03, 12:32 PM ET

NEW YORK, Jan 24 (Reuters) - Brazilian sovereign bonds drove the emerging debt market lower on Friday as the upcoming Monday release of a key U.N. weapons report kept uncertainty running high, prompting investors to trim some of their holdings. Venezuela's bonds hovered steady as investors saw a glimmer of hope for the oil-reliant economy ravaged by a seven-week-old general strike. Although foes of President Hugo Chavez are maintaining the shutdown, the use of replacement workers has helped lift oil output, which should bolster the finances of the cash-strapped government.

Brazil's share of the J.P. Morgan Emerging Market Bond Index Plus lost 1.33 percent in terms of daily returns, helping to press the broader index down 0.32 percent on the day. Venezuela's portion of the index was little changed.

With weapons inspectors set to deliver their findings of a two-month search for Iraqi arms to the U.N. Security Council on Monday, many investors were lightening their positions or sitting on the sidelines, said traders. If Iraq is found in "material breach" of U.N. resolutions, it could trigger war.

"There's too much in the air for next week so I think people are just a little concerned going into the weekend not knowing what will happen on Monday," said an emerging debt trader. "It's almost like the year-end when people were paring positions just to see what happens."

The war worries have weighed on U.S. stocks and the dollar in recent days as investors fret about the global economic fallout of a possible U.S.-led attack on Iraq. Sliding U.S. markets, in turn, reduce investor appetite for riskier assets, such as emerging debt.

Brazil, in particular, has taken a hit from the Iraq nervousness. Optimism over the economic policies of new President Luiz Inacio Lula da Silva fired up Brazilian bonds in the beginning of the year, giving investors room to take profits.

"In Brazil, I think a lot of guys are just pushing short (positions)," said another emerging debt trader. "It's probably not a bad strategy given people's lack of desire to own anything right now because there's so much uncertainty in the world."

In Venezuela, Chavez is using troops and replacement crews to try to break the strike that is aimed at forcing him to resign or call new elections. Opposition oil workers conceded that crude production was rising and reached 25 percent of capacity at 812,000 barrels per day (bpd) on Thursday. But the government says production is above 1 million bpd.

Investors are also hoping the mediation efforts of former U.S. President Jimmy Carter and a six-nation group led by the United States and Brazil will yield a resolution to the impasse. The group of nations was slated to hold talks in Washington on Friday with Chavez's government and his foes.

"We expect the gradual improvements now underway will fuel a gradual rally back to around 75 on DCB (bonds), up from about 69.5 now, although that rally could take a painful few weeks to develop," said Christian Stracke, head of emerging debt strategy at research firm CreditSights, in a report.

Venezuela's DCB bond <VENDCB=RR> was 0.5 points higher in Friday midday trading at 68.75. (Reporting by Susan Schneider; editing by Phil Berlowitz; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)