Emerging debt-Venezuela gains as rest of market drifts

www.forbes.com Reuters, 01.29.03, 12:33 PM ET

NEW YORK, Jan 29 (Reuters) - Venezuelan sovereign bonds climbed more than 1 percent on Wednesday as cracks in a two-month-old general strike gave investors hope that stalled economic activity, particularly oil output, is on the path to recovery. The broader emerging debt market drifted, however, as persistent worries about a possible U.S.-led attack on Iraq weighed on U.S. markets, keeping investor sentiment toward riskier assets cool. Venezuela's share of J.P. Morgan's Emerging Market Bond Index Plus jumped 1.62 percent in terms of daily returns as spreads over comparable U.S. Treasuries -- the premium investors demand to compensate for risk -- narrowed 0.44 percentage points to 12.67. Venezuela's private banks decided on Wednesday to restore normal working hours after operating for a limited schedule in support of the shutdown staged by foes of President Hugo Chavez. The banks join the private businesses, restaurants and stores that have reopened to avert bankruptcy. "The market has been starting to price that very slowly the strike has begun to show cracks," said an emerging markets analyst who did not want to be identified. "The strike is definitely losing support and people are definitely going back to work, but to what degree it's difficult to say." Rising oil production has also helped ease the gloom weighing on Venezuelan bonds, which have slumped nearly 6 percent so far this year on fears that the economic shutdown will leave the nation without the cash needed to pay its foreign debts. With the government using troops and replacement workers to try to break the strike, Venezuela's oil output reached above the one million barrel per day (bpd) mark this week for the first time since the strike began, according to striking oil workers. Chavez has said crude output is 1.32 million bpd. The trouble, said analysts, is that Venezuela is still a long ways from the 3.1 million bpd it pumped before the strike. "The problem is that you get it up to one million and you still have two million to go," said Daniel Tillotson, an emerging markets analyst at Prudential Securities. "As some people have been saying, that first one million is the easiest to get back on line and then it gets harder." Prior to the strike, Venezuela's government relied on oil for about half its revenues. The broader EMBI-Plus added a scant 0.20 percent on the day as market heavyweight Brazil inched 0.59 percent higher. Brazil's benchmark C bond <BRAZILC=RR> rose 0.375 points to 67.5 bid. Traders and analysts said the neutral day reflected a lack of news in Brazil, which accounts for about a fifth of the EMBI-Plus, and a rocky day in U.S. equity markets. When U.S. markets slide,investors often become more skittish about taking major bets in riskier markets, like emerging debt. "It's unexciting as far as Brazil goes today," said an emerging debt trader. The U.S. Dow Jones Industrial Average <.DJI> trekked 0.95 percent lower and the Nasdaq Composite Index <.IXIC> shed 0.86 percent after U.S. President George W. Bush fueled fears of a U.S. attack on Iraq in a State of the Union speech on Tuesday night. Bush vowed to provide new intelligence on Iraq's alleged arms programs and to use full military force to disarm Iraq, if necessary. Investors are worried that a conflict could do further damage to an already sluggish U.S. economy. Emerging market investors were also on the lookout for a planned Peruvian bond sale of up to $1 billion, a deal that could be placed before the end of the week, traders said.