Emerging market debt weaker; Ecuador paper down on impeachment proceedings

By Reshmi Basu and Paul A. Harris

New York, Nov. 8 - Emerging market paper was softer Monday ahead of Wednesday's Federal Reserve meeting.

During the session, the JP Morgan EMBI+ lost 0.37%. The Russia bond due 2030 was down one point to 100 bid, the Venezuela bond due 2027 lost 0.95 to 102¾ bid and Mexico's bond due 2008 fell 0.20 to 106.70 bid.

U.S Treasuries declined on the foregone conclusion that the Fed would hike short-term rates for the fourth time this year.

The yield on the 10-year note climbed to 4.22% from Friday's close of 4.19%.

The Federal Open Market Committee is expected to raise the benchmark interest rate by 25 basis points to 2%. But Friday's stronger-than-expected non-farm payroll numbers in the United States created uncertainty as to whether the Fed would hike rates by another 25 basis points at its Dec. 14 meeting.

U.S interest rates continue to be the most important driver in emerging markets, said an emerging market analyst.

"The strong U.S payroll data last week has everyone expecting a Fed hike this week plus hawkish language in the subsequent minutes," the analyst said.

"High global liquidity has, of course, been the main engine powering EM outperformance this year, so any signs that U.S rates will rise more than previously expected will only mean more selling in EM.

"110 is still an important technical level for Brazil '40s, as is 135 on Turkey '30s.

"We're still a good ways above those levels (111.5 and 137.5), but further UST weakness could easily threaten those support levels," he said.

Latin America paper down

Paper from Latin America was down Monday on the outlook that interest rates will be higher in the months to come.

The Brazil C bond fell 0.313 to 99.187 bid while the bond due 2040 lost half a point to 111.80 bid. "Brazil was pretty much down during the whole session," said the Latin America debt strategist for Refco EM.

"It's a reaction to what's going on in the [U.S] equity market here and also the view that the Treasury market will see the effects of a restrictive monetary policy here in the U.S."

He also added that emerging markets have become quite expensive in terms of spreads compared to last year.

"I think a little bit of a correction that allows attractive entry points in a couple of weeks from now would be welcomed," he said.

Furthermore, the window of opportunity is closing for issuers, he commented.

"I think we've seen the best out of new issues in the previous months.

"I'm not expecting a lot of names to try to issue under these circumstances," he said.

Ecuador down on impeachment

President Lucio Gutierrez faces impeachment on allegations of misuse of public funds. Opposition parties in Congress initiated the impeachment process last week. Gutierrez has been charged with allegedly using state funds to finance his party's candidates in municipal elections last month.

The impeachment process in Ecuador is fairly simple and quite unique to Latin America, according to the debt strategist at Refco EM.

The call to sack the president requires the consent of at least 25 lawmakers out of the 100 member Congress.

Last week opposition lawmakers signed a petition, which created a committee to consider the charges. The committee has five days to present a report to Congress, which will then need 51 votes to start the impeachment hearing.

The process usually takes 30 days to 45 days, according to the strategist.

If the final tally is 67 votes in favor of impeachment, the president, who was elected in 2002, would be removed.

"What the market believes is that the opposition does not have enough votes to impeach the president," said the strategist.

But in order to keep his job, Gutierrez will have to make concessions to the opposition party, such as fiscal projects or congressional seats, he said.

"The main figure to be watching here is the ex-president [Leon] Febres Cordero. He is supporting the impeachment process. He's got a lot of political leverage and he may be able to obtain more votes.

"But we don't think that's the case at this point."

"We're going to have a lot of noise that is going to move the sovereign bonds lower," said the Refco strategist.

The Ecuador bond due 2030 was down 0.20 to 83.65 bid.

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