Emerging markets stage Monday afternoon recovery after high beta Asian names see all-time wides

By Paul A. Harris

St. Louis, March 17 - Fear gripped emerging markets as the week got underway, sending some high beta names in Asia and Latin America to all-time wides.

However as the day wore on those high beta names, including Ecuador, the Philippines and Venezuela retraced most of that lost ground.

The fear, sources said, was driven by last week's phenomenal implosion of investment bank Bear Stearns, and Monday's news that JP Morgan, the partner with the New York Federal Reserve Bank in a bailout plan for Bear revealed last Friday, would acquire Bear Stearns for $2.00 per share.

Sources said that the Bear Stearns news, coupled with the dramatic steps undertaken by the Fed - including an emergency weekend meeting which resulted in a cut in the discount rate to 3¼% from 3½%, and the creation of a lending facility to make short-term loans to financial institutions for at least six months - drove apprehension in the capital markets to extreme levels.

All focus on U.S. markets

Enrique Alvarez, head of Latin American financial markets for IDEAglobal, told Prospect News on Monday morning that emerging markets are presently in the grip of events now unfolding in the U.S. capital markets.

"There is the potential that there could be some overflow into selling emerging markets assets as the credit markets come under more pressure," he said.

Alvarez spotted JP Morgan's EMBI Plus index at a 324 basis point spread to Treasuries, mid-morning on Monday, 13 bps higher than last Friday's close.

"We haven't been there in some time," he commented.

"There is pressure in the high beta spaces, where you would expect it," Alvarez added.

"There is liquidation and short selling in Argentina.

"There is also liquidation in Ecuador; that credit was stuck to its levels for quite a while."

He said that concerns about the U.S. markets did not appear to be impacting the "core credits."

"When it comes to category leaders, such as Brazil, there is a tad of weakness," he said.

"But they have not sold off. There is more of a wait-and-see attitude there.

"As has been the case in the past they are using the high betas as proxies for the overall market, and selling those rapidly."

Alvarez added that emerging markets players are apprehensive that the margin calls and forced selling that have impacted hedge funds over the past two weeks could trickle into Latin America.

"So far that has not happened," he said.

An investor, staying on the sidelines

Whereas Alvarez saw the EMBI plus at a spread of 324 bps in the middle of the New York morning, an institutional investor who focuses on the Latin American emerging markets, speaking in the early afternoon, spotted the index at a 329 bps spread, and commented that it was the highest spread the index had seen since summer 2005.

The investor said that although there had been no meaningful trading in the cash market to that point, there had been activity in the CDS market, pushing most of the levels between 10 bps and 30 bps wider.

The higher beta credits, such as Argentina and Venezuela, saw the most widening.

"Venezuela is 20 bps wider, improved from 30, earlier in the day," the investor commented, adding that Brazilian spreads were then 8 bps wider, in from 15 bps near the Monday open.

"You realize how desperate the situation is when the Fed decides to widen the liquidity window to the broker-dealers, and extend it to 90 days from 30 days," the investor said.

"The Fed has also granted greater latitude with respect to the kinds of securities which may be posted as collateral.

"The financial system in the U.S. is under quite a bit of stress."

Nevertheless, the institutional investor said, Monday's moves by the Fed, dramatic though they may be, will not be sufficient to stabilize emerging markets.

"You don't have a clear view as to where the market is going, so you might as well stay on the sidelines."

Late afternoon short squeeze in CDS

According to a market source, the EMBI plus, having earlier in the session pushed to wides not seen since summer 2005, actually retraced some of the ground given up during the dramatic widening seen Monday morning.

This source had the index closing at a spread of 322 bps, 11 bps wider on the session, all told, but 2 bps lower than levels which IDEAGlobal's Enrique Alvarez reported approximately four-and-a-half hours earlier.

Meanwhile, unsurprisingly, there was no news whatsoever from the primary market.

A few minutes after the New York close, a trader who focuses on Asian fixed income said that although there had been some selling in cash bonds, the main story during the last hour of the Monday session was "a reasonable short squeeze in CDS and the indexes.

"You saw a decent short-covering bounce in a lot of the instruments that are being used for hedging," the trader added.

"That reflects at least some willingness to take some short risk off, just in case things work out."

Apart from the short squeeze it had been a quiet day, said the source.

As was true of high beta Latin America, high beta Asian names widened significantly during the extremely volatile New York Monday open.

"We hit some new wides," the trader conceded, adding that at the open Philippines five-year CDS traded out to a spread of 277 bps, representing an all-time wide.

"But it came in to 262," the trader added.

"That's a 15 basis points swing.

"It went out wrapped around 260, which is pretty much where it closed on Friday."

The trader added that the indexes closed the Monday session well off the wides, and added that the Asian high yield index, which flashed out to 640 bps - equal to the all-time widest print - ended the day offered at 620 bps, 20 bps off the wide, on the offered side.

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