Emerging markets succumb to macro trouble; prices down with equities; pipeline corked

By Aaron Hochman-Zimmerman

New York, Jan. 18 - Emerging markets prices began to circle the drain in the equity whirlpool during Friday's shortened session.

The specter of wider economic trouble loomed larger as president George Bush called for a $150 billion aid package.

"We're basically following stocks around," a trader said.

The high-betas led the retreat.

Argentina lost 1.75 from its discount bonds due 2033, while Venezuela saw its bonds due 2027 fall 1.3.

"There's a dual problem in my appreciation," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The first is with the U.S. consumer, regarding "what is going to happen with the stimulus package," he said, wondering if its effects will be felt in Latin America.

The other problem, of greater consequences, is over confidence in bond insurers, he said.

Triple-A rated "Ambac is up for review by Moody's," he said, adding: "There is potential there for a disaster.

"I think the category, after being resilient for quite a while, will be obligated to take a step back," he said about emerging markets in general.

As gloomy as the market may look, it has not hit bottom, according to one trader.

"Volatility hasn't really spiked yet," he said.

"You haven't seen the retail investors start to come in and sell yet," he said, adding that he will feel "quite bearish" until receiving confirmation from the retail investors that the market has hit the ground floor.

Volatility fell by almost 2 points at the open as stocks were encouraged by the prospect of a stimulus package. However, as confidence flagged on the equity side, volatility crept back and was seen down only 0.22 to 28.24, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector, emerging markets widened slightly as Treasuries cooled. Spreads were out by 2 basis points to 274 bps, according to JP Morgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors demand to keep money in emerging markets debt.

LatAm knocked down

Resilient Latin America began to show the battle scars from days off shelling by the major markets.

"Bids are retreating as we speak," said IDEAglobal's Alvarez, blaming "spillover related to overall negative sentiment in the environment."

"Brazil is again pointing the way here," he said about its underperformance lowering the standard for emerging markets.

Its downturn has come "alongside Argentina, which is the high-beta representative.

"Brazil is a key here," he said, "Brazil tends to be very resilient, then gap lower."

The 7.125% bonds due 2037 were lower by 0.25 to 110.25 bid, 111 offered.

"People have been a lot more solid at the front end of the curve," he said about Brazil, but "over time that may not continue."

"You'll see the front end also come loose," he said, and people may run to the "defensive credits," such as Panama, where the bonds due 2027 traded down 0.5 to 128.5 bid, 129.5 offered.

He also suggested there may be "parking opportunity" in Peru, as one of the higher-rated Latin American credits.

Argentina's 8.28% bonds due 2033 were thrown back by 1.75 to 92.5 bid, 94.75 offered.

"Venezuela has been somewhat guarded today," he said.

The 9.25% government bonds due 2027 were lower by 1.3 to trade at 100 bid, 101 offered.

Colombia's 7.375% sovereigns due 2037 showed some fatigue as well, losing 0.75 to trade at 106.5 bid, 107.5 offered.

Asia looking 'pretty bad'

"Were just trading [with] stocks, that's what it comes down to," a trader said about Asian credits following diving equities.

"It's pretty bad ... very choppy," he added.

Sovereign cash held in relatively well, he noted.

"Some of the Chinese names are trading cash up front and CDS," he said.

"We're banging around near the wides," he said about the Asian high yield index.

In the Philippines, the central bank reported that rules governing investment in unit investment trust funds (UITFs) will be changed, according to the Manila Times.

UITFs are bundled investment vehicles which are subject to fluctuating interest rates.

The rule changes come after many private investors lost money due to a lack of understanding about the investment.

The Filipino sovereigns due 2030 dropped 0.5 to trade at 131.25 bid, 132.25 offered.

"The new Indonesia deal has continued to do pretty well," a portfolio manager said.

"That says that if bonds come at the right spread and the right size, investors are willing to position that paper and could benefit from it."

The Indonesian government bonds due 2018 lost 0.25 to trade at 102 bid, 102.5 offered. The bonds due 2038 gained 0.125 to trade at approximately 104.375 bid, 105.25 offered.

Also in Indonesia, a government official criticized the lack of cooperation between the central government and local governments and smaller businesses, reported the Jakarta Post.

The government enacted policies to aid small- and medium-sized businesses in 2007, but their implementation was insufficient, the official said.

Pakistan's former prime minister and opposition leader Benazir Bhutto was killed by men answering to al-Qaida linked militant Baitullah Mehsud, the U.S. Central Intelligence Agency's director Michael Hayden said.

The CIA theory supports the views of the Pakistani government.

The Pakistani bonds due 2017 were flat at 82 bid, 85 offered.

By increasing trade with China, British prime minister Gordon Brown believes "tens of thousands" of jobs will be created in the United Kingdom, the BBC reported.

While in China, Brown met with Chinese premier Wen Jiabao to sign an agreement to increase trade between the two countries by 50% by 2010.

Emerging Europe pushed lower

Prices in emerging Europe were pulled under by weak equities as optimism faded.

"Everybody is just happy the market is going to close early," a portfolio manager said.

Ground was broken on Turkey's industrial zone outside Cairo, Egypt, according to the Turkish Daily News.

The $1.5 billion industrial park is expected to support 125 companies.

The Turkish sovereign bonds due 2030 dropped 0.75 to 155.5 bid, 165.5 offered.

Russia's president Vladimir Putin was in Bulgaria to discuss energy policy and sign an agreement which will allow the proposed South Stream pipeline to travel through Bulgaria on its way to Italy.

The €10 billion project will be jointly controlled by OAO Gazprom and Italy's ENI.

Serbia may also serve as a hub for the pipeline.

Bulgaria also arranged a €3.9 billion deal for the construction of a nuclear power plant by Russia's state-run nuclear equipment monopoly Atomstroyexport.

The Russian sovereigns due 2030 were seen unchanged at 115.25 bid, 115.4 offered.

Bulgaria's lightly traded bonds due 2015 were also unchanged at 118 bid, 118.6 offered.

Pipeline seized by trading trouble

Many investors were too concerned with their current positions to think about new issuance.

Still, rumors of a dual-tranche three-year samurai bond from Korea's Kookmin Bank were somewhat corroborated by it's having "been in demand in CDS [Friday]," a trader said.

Korea's Woori Bank is also rumored to be coming in Malaysian ringgit rather than in dollars, the trader said.

If true, the rumors show that Korean banks are looking to stay clear of the unpredictable dollar market, he said.

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