Emerging markets bounces on central bank news; mostly flat but high-betas lose; primary closing down

By Aaron Hochman-Zimmerman

New York, Dec. 12 - Emerging markets spent the day waffling on the mood swings provided by the equity market and the announcement of a joint central bank bailout.

Credit followed equities and ended the day flat to slightly higher with the exception of the high-betas which fell, but only slightly.

Argentina's discount bonds due 2033 were the big losers of the day as they slipped 0.75.

The primary market already seemed shut for the season, according to many investors, although there are still some market watchers who are keeping a suspicious eye out for a local deal to sneak through.

In the secondary, the sharp reversal of course came on the news that "the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets," said a statement from the Federal Reserve.

The central banks will provide loans to retail banks which face problems but are "institutions that are judged to be in generally sound financial condition," the statement said.

The encouraging news from the banks was designed to improve "the Libor market and we still won't know [about] that for a couple of days," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The market will probably find a way to stabilize "unless something goes enormously wrong," he said.

Still, an analyst said: "We still have another round."

A buysider said he expects "more ups and downs" as the market is apt to stay "like this until mid-next week," he said.

"[The swings] depend on the numbers," he said referring to earnings expected from the major investment banks beginning with Lehman Brothers on Thursday.

However, volume will dry up, he said.

"Very illiquid, the most in the CDS, if at all," he said about the trading for the days before the Christmas break.

"It'll be a successful finish to December if we just have a calm exit to the year," a trader said.

"It doesn't mean anything has changed just because it clicks into January," he said.

However, "psychologically a lot changes," he said when "you get a fresh pair of eyes and a fresh piece of paper."

Hopefully more money will be put to work, he said, but added that some people in the market have been "extremely negative."

They are worried that the subprime problems that have surfaced so far are only the tip of an iceberg which is "going through the food chain" down to debt such as auto loans and credit cards.

Volatility crawled back after a low opening, but still ended the day lower by 1.12 at 22.47, according to the VIX index. The index is a commonly used gauge of market volatility.

Despite some waffling on the equity side, emerging markets tightened by 4 basis points to a spread of 234 bps on the session, according to JP Morgan's EMBI+ index. The EMBI+ calculates how much extra yield investors require to keep money in emerging markets debt.

Emerging Europe stronger on central bank bailout

Emerging Europe traded higher on light holiday season volumes.

It took its lift from the central banks' announcement of a large-scale bailout of retail banking.

"In the short term it's fixing things," a trader said.

"Why they didn't announce it yesterday, I'm not quite sure," he said.

"It's shored up the defenses for now," he added.

Representatives from Russia's central bank, along with other bankers from Russia and Kazakhstan met in Almaty to form a Eurasian banking club, according to the Itar-Tass News Agency.

The purpose of the group is to encourage cooperation and communication between their respective financial communities.

The Russian sovereign bonds due 2030 were up 0.35 to trade at 113.85 bid, 113.9 offered.

Kazakh banks have passed the first major hurdle of the credit crunch, a market source said.

Still, their troubles are likely to persist into 2008 as slower growth will expose more problematic loans which had been shrouded by a booming economy.

In Turkey, the government has expanded its build-operate-transfer law, reported the Turkish Daily News.

The law allows private companies to build national infrastructure and other facilities and operate them for a set period before handing them back to the government.

Formerly highways, bridges, tunnels, dams, irrigation networks, among other things were included, but the now the law has expanded to cover bus and train stations, logistics centers, ports, customs gates and integrated industrial facilities, the report said.

The Turkish bonds due 2030 added 0.75 to trade at approximately 157.75 bid, 157.85 offered.

LatAm showing year-end stability

Latin America was already in its "pre-holiday condition," IDEAglobal's Alvarez said.

Volumes are slim and volatility is down for most credits with the exception of Argentina and Venezuela which have come to represent the high-betas in the category.

"Ecuador seems to have jumped out of that trio," Alvarez said.

"It could move around the next couple of days," he said about the market, but added that it is not likely.

Investors "may add some additional Brazil or add some additional Colombia in their portfolios" before the end of the year, he said.

Then "next week the liquidity tends to die down even further ... No one's home after that in all of Latin America," he added.

Argentina its 8.28% discount notes due 2033 lose 0.75 to 97.3.

"That's the biggest hit," Alvarez said.

Venezuela's 9.25% government bonds due 2027 dropped 0.6 to trade at 100.4 bid, 101 offered.

Stable Brazil saw its sovereigns due 2037 hold basically flat.

They were quoted at 113.9 bid, 114.2 offered.

The 11% bonds due 2040 were up 0.35 to trade at 134.35 bid, 134.4 offered.

Primary hears sleigh bells, little else

Despite the extra liquidity provided by the world's central banks, the primary seems to have closed for the year.

"I haven't heard anything of any concrete nature at all," a trader said.

"It's possible, I suppose," he said about a last minute issue finding an opening in the pipeline.

"A well-known issuer" may have a chance if there was no need for a lengthy sales pitch, he added.

Mexico and its corporates have been active as local issuers but its new issue regulator closes for the holidays on Friday, according to a buysider. The office will reopen for filings on Jan. 7.

Christmas is less of a hindrance to business in the Muslim countries of the Middle East.

Even when other sectors struggled "we have seen some issuance on that side of the globe," the buysider said.

"They have their own pool of money and they're going to put it to work," he said, but they may have to wait, he said.

"Actually there's nothing ... I don't see anything," he said about news around the primary market.

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