Emerging market debt softer on commodity weakness; Brazil slips on election doubt

By Reshmi Basu and Paul A. Harris

New York, Oct. 3 - Emerging market debt saw a less supportive session Tuesday as Latin American credits, led by Ecuador and Venezuela, extended losses on tumbling prices of commodities such as gold and oil.

Meanwhile Brazil failed to capitalize on Monday's post-election rally.

At session's end, JP Morgan EMBI Global index was down 0.15% while spreads widened by two basis points versus U.S. Treasuries.

Brazil sours

On Tuesday, "the reality from Brazil's election results sunk in," according to a market source.

In the previous session, the country's local and external markets rallied on news that president Luiz Inacio Lula da Silva would face off against a business-friendly opposition candidate Geraldo Alckmin in the second round election on Oct. 29.

The news was seen as a win-win situation on the expectation that economic policy would remain intact under either a Lula or Alckmin presidency.

But now there are worries that neither candidate will be able to muster enough support to push through ambitious tax and pensions reforms amid a divided congress, noted the source.

As a result, Brazil was unable to bask in the glory of Monday's rally during which its spreads narrowed by two basis points.

On Tuesday, the country's curve "traded in the red," noted a trader.

The bellwether Brazilian bond due 2040 lost 0.35 to 130.25 bid, 130.35 offered.

Ecuador, Venezuela slip with oil

U.S. stocks posted a new record close Tuesday on the back of a sharp fall in oil prices. Oil closed out the session at $58.68 per barrel, down $2.35. The Dow Jones Industrial Average index ended at 11,727.34, surpassing the prior record of 11,722.88 that was set on Jan. 14, 2000.

And while the oil price drop was a boon to equities, it spelled trouble for commodity exporters in the Latin American region, noted sources.

Oil producer Venezuela saw its curve come under pressure, particularly in the long end, according to a second trader.

The Venezuelan bond due 2027 gave up 2.15 to 120.50 bid, 120.75 offered while the country's bond due 2010 lost 0.75 to 96.25 bid, 97 offered.

Its component of the EMBI global index kicked out by 16 basis points versus Treasuries

Meanwhile Ecuador suffered from a double whammy Tuesday, pressured by lower oil prices and political jitters, noted the second trader.

According to new polls, radical leftist Rafael Correa is gaining momentum while center-left Leon Roldos is losing support. The results suggest an increased likelihood that Correa will clinch victory in the first round, a scenario that does not sit well with Wall Street.

During the session, the Ecuadorian bond due 2012 eased 0.60 to 99.50 bid, 99.90 offered while the bond due 2030 shed 0.85 to 91.45 bid, 92.15 offered. The country's portion of the EMBI global index widened by 13 basis points.

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