Emerging markets' decline unfazed by U.S. government bailout; spreads wider; pessimism prevails

By Aaron Hochman-Zimmerman

New York, Oct. 3 - Emerging markets remained on a widening trajectory on Friday even after the U.S. House of Representatives passed a $700 billion economic rescue package.

President George Bush later signed into law the bill that had captured the market's and the world's attention.

"We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy," Bush said at the White House as he signed the controversial bill.

When asked about how the market tone was viewed after the bailout passed, a syndicate official said: "Not very differently."

Trading remained stunted as investors were "just watching currencies," the official said, "so much of the market is very local."

It is possible to conduct limited business in the local markets; however, the major currency primary remained dormant.

In the last quarter, the sector has posted $5.2 billion in outflows from emerging market bond funds, according to EPFR Global.

The primary is waiting for high-grade issuers to set a benchmark, the source has said.

Until there is leadership, the primary will not be able to resurrect itself.

In trading, even before the afternoon nosedive "the market remains heavy despite strength in equity markets," a trader said earlier in the day, as the bailout package would prove to fall short of supporting the day's early gains.

Equities lost 157 points from the Dow Jones Industrial Average; however, volatility actually managed to end the day lower by just 0.12 at 45.14, according to the VIX index. The index is a frequently used yardstick of market volatility.

As equities faltered, Treasuries charged and left emerging markets wider by 6 basis points at 441 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Argentina, corporates burned

Rising Treasuries, a sour tone and more political turmoil weighed on Latin America's unrealized hopes of a rally on the $700 billion bailout.

In Argentina, farmers were back on the picket lines and are expected to slow beef exports and halt grain exports for the next six days.

The farmers claim that despite minor victories during the last major round of protests, the government has not taken steps to fully support them.

The farmers are demanding subsidies for smaller farms and storms affected by droughts in the northern regions of the country.

The peso was seen trading at 3.164 to the dollar.

In corporates, "the market remains under pressure," a trader said after word of the bailout's passage came down from Capitol Hill.

Argentina's Empresa Distribuidora y Comercializadora Norte SA saw its debentures due 2017 trading in the 70s earlier in the session, a trader said.

Edenor repurchased $6 million of the issue on Thursday.

Mexico's Corporacion Durango SA de CV was hit as it was downgraded by Standard & Poor's to CC from CCC-, "under the assumption they will miss coupon on Monday," a trader said.

Also in Mexico Vitro SA was "hammered as well," the trader said.

The "shorter issue due 2012 is trading north of 20% now," he said.

"The buyside is finding it hard to justify buying this stuff given the yields offered by high-grade domestic debt as the sell-off continues," he added.

Emerging Europe wider

Emerging Europe slowly drifted wider as U.S. equities posted early gains, although the tone remained negative as a bailout was not seen as anything close to a panacea.

In Russia, the lower house of parliament passed one of the two bills aimed at stabilizing the Russian economy.

The new law allows the central bank to offer up to six-month loans to worthy credit organizations which lack security, the Itar-Tass News Agency reported.

The central bank itself will determine which institutions are worthy.

Communist party critics of the bill alleged that the bank will only give loans to "its friends," the report said.

The bill's supporters pointed to the need for a more liberal credit environment in the suffering economy.

"Russia is a mess," a trader said.

The ruble was seen trading at 25.961 to the dollar.

Meanwhile, Ukraine prime minister Yulia Timoshenko continued her meetings with Russian prime minister Vladimir Putin.

The two met near Moscow where they signed a preliminary agreement for gas shipments between national energy firms OAO Gazprom and Naftogaz Ukrainy.

The hrvynia was seen trading at 5.247 to the dollar.

Asia weakens

The bailout package from the U.S. House of Representatives did not constitute a life raft for emerging Asia, at least not on Friday.

In the Philippines, by the end of the first half, the total of loans outstanding from foreign currency deposit units was up by $187 million, or 4.3%, to $4.6 billion, the central bank said.

The number is 40.4% higher than during the same period of 2007.

The loans are almost entirely held by private accounts, which make up 97% of borrowers, the bank's statement said; 78% are residents of the Philippines.

The peso was seen trading at 47.102 to the dollar.

In Indonesia, the government stated that the economy is strong enough to have survived even if the United States did not pass the bailout package, the Jakarta Post reported.

"It's impossible that the world does not need our commodities," said vice president Jusuf Kalla in the report.

"Regardless of the degree of the crisis in the U.S., the world still needs oil, coal, textiles and palm oil," he added.

The rupiah was seen trading at 9,425.05 to the dollar.

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