Emerging markets slips lower; Argentina loses, Venezuela steady; lights off, doors locked in primary

By Aaron Hochman-Zimmerman

New York, Feb. 8 - Emerging markets sank lower to end a week that saw sentiment and prices head south.

Confidence may have been on its way out, but to a small degree cash was headed in.

Emerging markets turned around a two-week losing streak by adding $35 million of inflows to the sector during the week ended Wednesday, according to EPFR Global.

Friday's trading left Venezuela's bonds due 2027 close to Thursday's close, as the state-owned oil company PDVSA decided how to handle the freezing of $12 billion by courts in the United States, United Kingdom and the Netherlands.

Argentina took the honors as the day's biggest loser as its discount bonds due 2033 lost 1 point.

"There's a lot going on, and not a lot of it's good," a trader said.

Conversely, the primary pipeline remained seized for another day.

"It's been deathly quiet," a syndicate desk official said.

"Fear has taken over the market," he said.

"My personal feeling is that things are going to be tough through the third quarter," he said.

Elsewhere, volatility was on and off in the morning, but was headed higher later in the day. The VIX index finished up 0.35 at 28.01. The index is a standard measure of market volatility.

Treasuries advanced on the rocky equity performance while emerging markets widened by 13 basis points to a spread of 284 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to keep assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 12 bps to a spread of 306 bps.

The diversified index has a less strict liquidity rule for inclusion.

LatAm loses on poor tone

Latin American trading did not put smiles on investor's faces as sentiment soured across emerging markets.

"In the broader market it almost seems like we are in a stalemate," a syndicate desk official said.

Venezuela's bonds held steady as investors discussed the news of its $12 billion asset freeze in the Netherlands, United Kingdom and United States.

The decision was a rebuke to president Hugo Chavez and his ideas of resource nationalism, a market source said.

The Venezuelan government may choose to appeal the decisions, "but that could drag on for a while," the source said.

Although, "it's very rare for a foreign investor to win over a sovereign," an emerging markets strategist said.

"It's unlikely the freeze will last forever," he said.

"The size of the claim is clearly exaggerated," the syndicate source said of the $12 billion.

"That's more shocking than the reality of the story," he said.

The Venezuelan 9.25% bonds due 2027 came up slightly from Thursday's court-ordered pummeling. The issue was up 0.1 to trade at 97.6 bid.

Argentina's economic statistics office, Indec, reported an inflation rate of 1.1% in January, which drew suspicion from many investors, a market source said.

Many investors have distrusted the official reporting of economic statistics since January of 2007 when then-president Nestor Kirchner replaced many Indec officials with what were assumed to be political allies.

The Argentine 8.28% discount bonds due 2033 were lower by 1 point at 89 bid.

Brazil continued to fall as its 7.125% bonds due 2037 lost 0.45 to trade at 105.7 bid.

In emerging Europe volumes up, prices lag

Emerging Europe saw another busy day of trading as high volumes knocked the benchmarks lower.

In Ukraine, the national energy firm Naftogaz Ukrainy issued a release stating it owes nothing to Russia's OAO Gazprom, according to the Itar-Tass News Agency.

The release also rejected Gazprom's claim that gas had been taken illegally from Gazprom's pipeline once inside Ukraine.

Gazprom announced it would reduce supplies beginning Monday if Kiev did not pay its alleged $1.5 billion debt.

The Ukrainian sovereigns due 2016 were quoted at 100.4 bid, 100.9 offered.

In Russia, at a session of the state council, president Vladimir Putin said Russia will one day become one of the world's financial centers due to its vast gold and foreign exchange reserves, which are estimated at $484 billion.

Putin also said his country is ready to "respond" to a new arms race, citing the missile defense systems the United States plans to build in the Czech Republic and Poland.

Elsewhere, Russian prime minister Viktor Zubkov met with Polish prime minister Donald Tusk to discuss energy policy and closer trading ties between the two countries.

The Russian sovereigns due 2030 fell 0.4 to 114.45 bid, 114.6 offered.

Turkey will accept bids until April to build three new power grids by the end of the year, according to the Turkish Daily News.

The grids are intended to prevent the energy shortages expected in 2009.

Allowing a deficiency of energy supplies would violate the terms of a $10 billion loan from the International Monetary Fund.

The Turkish government bonds due 2030 dropped 0.8 to trade at 154.95 bid, 155.4 offered.

In South Africa, president Thabo Mbeki said the ongoing power crisis will soon be resolved and attempted to allay concerns over the feasibility of hosting the World Cup scheduled for 2010.

The South African bonds due 2017 were quoted at 120 bid.

Asian credits slow, weak

Trading in Asia was still light as the lunar New Year celebrations go on overseas.

"We're at that stage of the holidays where we haven't had an Asian session for two [days]," a trader said, adding: "It does make the market a bit sketchy."

Still, "There are reasonable volumes in sovereign cash and CDS," he said as well as some trading in high grade.

"The tone is weak," he added, as the five-year CDS in the Philippines and in Indonesia widened another 10 bps.

"On the cash side, prices are down an average of a half of a point from yesterday and 1.5 from pre-New Year's levels," he said.

While the major markets are being roughed up, Asian economies have been buoyed by "strong macroeconomic fundamentals," especially in China and India, said the head of the Asian Development Bank, Haruhiko Kuroda, at the ADB Institute Symposium on Friday.

Growth will continue, but at a slower pace in 2008, he said as the growth in the United States is expected to grind down to 1.5%.

"The region's economies are not totally immune to global market turbulence and negative developments," he said.

"A significant slowdown in the U.S. economy will most certainly affect the region's growth performance through trade, investment and financial linkages," he said.

Even Europe and Japan will feel the effects of the slowdown, he added.

The government of the Philippines plans to sell warrants that will allow holders of foreign-currency debt to convert the debt to pesos, a market source said.

The sale is expected sometime in February.

The Philippine bonds due 2030 dipped 0.25 to trade at 130.75 bid, 131.25 offered.

In Indonesia, the government announced a plan to limit the subsidizing of fuel in favor of heavier subsidies on food, the Jakarta Post reported.

The program will be subject to further scrutiny before it goes into effect May 1.

The government may amend the policy to only include public transportation.

The Indonesian bonds due 2018 dropped 0.5 to trade at 102.75 bid, 103.25 offered.

Pakistan's bonds due 2017 were quoted at 83 bid, 87 offered.

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