Emerging Markets-Boost from U.S. debt and stocks, awaiting data

NEW YORK Wed Aug 27, 2008 5:15pm EDT

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NEW YORK Aug 27 (Reuters) - Emerging markets stocks and bonds edged higher on Wednesday, buoyed in part by a gain in world benchmark stock indexes amid the slow summer trading period.

A bigger-than-expected increase of 1.3 percent in U.S. durable goods orders for July, helped allay some concerns of a steep fall-off in economic growth. An expected upward revision in second quarter U.S. economic growth, due to be reported on Thursday, also helped sentiment.

At the same time, emerging markets are benefiting from the Federal Reserve's apparent hold on short term benchmark U.S. interest rates which benefits the higher-yielding bonds and currencies.

Thursday's U.S. GDP report is expected to show much better performance than previously thought, growing at a rate of 2.7 percent in the second quarter versus the 1.9 percent estimate of a month ago. The report is due at 8:30 a.m. (1230 GMT).

"This is a case where U.S. growth is likely revised upward and the Fed is not raising rates anytime soon. Global growth is slowing but not collapsing. All of this is great for emerging markets with their high interest rates, commodity dependent exports, which is a function of global growth," said Doug Smith, chief economist for the Americas at Standard Chartered Bank in New York.

In the equity markets, Morgan Stanley Capital International's emerging markets stock index .MSCIEF rose 1.64 percent to 953.93. The index remains near one-year lows.

In the bond markets, yield spreads on the benchmark JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS were unchanged at 309 over a flat U.S. Treasury market.

"Trading is very very light and the bonds are bid higher along with stocks. We've just traded better most of the day although it did start to sag into the close of trade. Argentina's buyback plans are helping but let's not make too much of it," said one trader at a German bank in New York.

A rebound in commodity prices against the backdrop of solid U.S. data helped the sector which is a big exporter of grains, metals and oil. Crude prices rose roughly $2 a barrel to $118.27 CLc1.

ARGENTINA BUYBACK

Argentina's yield spread on the EMBI+ narrowed by 8 basis points to 672 basis points, even as total returns fell 0.26 percent on the day.

Argentina said it would buy back up to 150 million pesos ($48.9 million) in bonds on Thursday, as part of a plan to buoy debt prices and reduce short-term financing problems.

Bonds eligible for buyback include the Boden 2012, Boden 2013, peso-denominated GDP warrants and dollar-denominated GDP warrants issued under Argentine legislation.

Argentina's government is widely accused by economist, consumer groups and renegade state statisticians of under-reporting inflation, partly to reduce its payments on inflation-linked debt.

The official annual inflation rate was 9.1 percent through July, whereas private estimates hover around 25 percent.

"These are not huge amounts of money but it makes sense to buy back... They have a little bit of money and they are taking advantage of low prices. They still do dumb things like manipulate inflation but this is a positive because it takes some pressure off the day of reckoning," said Smith.

In Brazil, the government cut this year's domestic debt sales plan for the first time since the series was created in 2000 as a crisis in global credit markets reduced foreign demand for local debt.

An 8.0 percent cut planned for debt sales will be made up for in government finances by a surge in tax revenue. (To read more on the reduced sales, please click on [ID:nN27513737].

Separately, Colombia said it may have overestimated projected government revenue in its $74.3 billion 2009 budget proposal if oil prices fall more than projected.

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