Emerging markets stretch wider; liquidity drying; Vimpelcom may bring eurobond

By Aaron Hochman-Zimmerman

New York, Jan. 17 - Emerging markets began to show fatigue from the weight of the major markets on Thursday.

Spreads widened and liquidity dried throughout the session, which was full of what one trader called "very nervous investors."

"Spreads are widening across the board and liquidity is a very serious problem," an emerging markets strategist said.

The high-betas were hit hard, but Venezuela was at the top of the loss column as its bonds due 2027 sank by 1.5.

"How much more bad news can there be?" a trader asked.

Merrill Lynch answered with an $8.6 billion loss during 2007, which made it the latest major bank to hit the skids due to the U.S. housing crisis.

"The market as a whole was ugly across the board," a trader said.

Meanwhile, Federal Reserve chairman Ben Bernanke testified before Congress on Thursday where he called for a stimulus package to be implemented quickly in order for it to have an effect on the economy within the next 12 months.

"Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving," he said.

Some have suggested that a 75 bps reduction may come from the meeting of the Federal Open Market Committee on Jan. 30, but "I don't think that's his style," a trader said about Bernanke.

Volatility made a steady climb into the afternoon and never looked back. The VIX index gained 4.08 to close at 28.46 for the day. The index is the accepted measure of market volatility.

As a sector, emerging markets were pushed wider amidst the volatility.

"Treasuries are up through the roof again," a trader said.

Spreads widened by 9 bps to 267 bps, according to JP Morgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will accept to keep money in emerging markets debt.

Emerging Europe waits out volatile market

Prices were taking small steps backwards as investors in emerging Europe were not inspired by the state of the market to make big trades.

Traders were content to sit on their hands again on Thursday as equities were hurting and Merrill Lynch reported its $14 billion writedown.

"That didn't help, did it?" asked a trader about Merrill Lynch's losses.

Still, "we've been pretty resilient, all in all," he said about emerging markets.

Not all optimism is gone.

"There are some green shoots of hope," he added.

In Turkey, the central bank cut interest rates by 25 bps to 15.5%.

In the third quarter of 2007, economic growth ran at a 1.5% lower rate than the year before, the worst performance since 2001, a market source said.

Also, EFG Istanbul Securities hosted investors from Dubai to discuss opportunities in Turkey, the Turkish Daily News reported.

In the financial sector, Halikbank drew strong interest, the report said.

The Turkish sovereigns due 2030 were down 0.65 to 156.25 bid, 156.375 offered.

In Russia, the Duma streamlined the process for bond issuance by corporate entities, according to a market source.

The new law cuts the reporting process by approximately two months, which should limit liquidity risks and increase interest in the Russian corporate sector, the source said.

The Russian sovereign bonds due 2030 slipped 0.15 to 115.25 bid, 115.375 offered.

In the Ukraine, the transport and communication minister Yosyp Vinskiy announced the country will sell its 67% stake in the telecom firm Ukrtelecom.

Also, Russian president Vladimir Putin is scheduled to meet with president Viktor Yushchenko on Feb. 12, according to the Itar-Tass News Agency.

The two heads of state will discuss the entire scope of relations between the neighboring countries and develop a Russian-Ukrainian Plan of Actions for 2008, the Ukrainian Foreign Ministry said.

The Ukrainian government bonds due 2016 were quoted at 100.125 bid, 100.625 offered.

LatAm wider on Treasury gains

Spreads were significantly wider in Latin America as only the strongest bellwether bonds were trading, a strategist said.

"Argentina is 20 [bps] wider ... Venezuela is wider by 25 [bps] to 27 [bps]," he said.

In line with projections, the government of Argentina announced a 1.2 billion peso deficit for the month of December and a surplus of 25.7 billion pesos for 2007, a market source said.

Also, janitors will be asked to report the number of air conditioners in their buildings in order to help the government develop its energy policy, a market source said.

The government attributes recent power cuts to an approximate 50% rise in air conditioner use since 2006 which represents over 1 million units, the source said.

The new air conditioners use around 3,500 megawatts of power compared to a peak demand of near 18,000 megawatts, the source said.

Argentina's 8.28% discount bonds due 2033 slipped 0.75 to 94.25 bid, 94.9 offered.

Venezuela's congress approved a financing budget for $7.6 billion of new issuance in 2008, a market source said.

Venezuela's 9.25% government bonds due 2027 stumbled by 1.5 to 101.3 bid, 102 offered.

Even stable Brazil saw its issues drop.

The 7.125% bonds due 2037 fell by 1.25 to 111 bid, 111.5 offered. The 11% sovereign bonds due 2040 were quoted at 135.375 bid, 135.5 offered.

In corporates, a market source expects the profitability of Latin American issuers to be tied tightly to the macroeconomic scene for most of the first half of 2008.

The effects the U.S. subprime crisis will have on emerging markets must be fully considered before activity increases in the sector, the source said.

Although fundamentals remain strong, once growth resumes it will still fall short of levels seen for the past two to three years, the source said.

However, some industries such as media, telecommunications, commodities and energy are still worthy of an overweight, the source added.

Asia starts to sell

Trading in Asian credits picked up for the first time in recent sessions as selling began to gather steam.

"Up until this week investors have been holding off in selling," a trader said, adding: "Now guys are looking for bids ... Should that continue, this is only the beginning of a serious letdown."

In the Philippines, "cash at the margin outperformed," he said, after it had underperformed for the past few days.

Meanwhile, the central bank announced inflation-related losses of PHP 67 billion during the first 10 months of 2007.

During the same period of 2006 the bank lost PHP 62 billion.

The peso was seen trading at 40.75 to the dollar.

The Philippine bonds due 2030 gained 0.25 to trade at 130.75 bid.

Indonesia's Jakarta International Container Terminal intends to expand its capacity by 57%, according to a report in the Jakarta Post.

The expansion and equipment update will require an investment of $150 million.

"Indonesia remains firm," the trader said.

"There was a little profit taking on the new deal," he said about the 10- and 30-year bonds priced on Jan. 10.

The Indonesian bonds due 2018 and 2038 lost their overnight gains to trade flat at 102.25 bid and 104 bid, respectively.

The government bonds due 2017 were up 0.3 at 102.25 bid.

In Pakistan, for the second day in a row, government troops were overrun by pro-Taliban forces in the tribal region of South Waziristan.

The Pakistani bonds due 2017 saw some mild trading and were quoted at 83 bid.

Vimpelcom eurobond rumored

Russia's Vimpelcom plans to raise $3.5 billion in loans in order to acquire fellow Russian telecom, Golden Telecom, a market source said.

Moscow-based Vimpelcom is expected to refinance the $1.5 billion bridge loan portion with a eurobond issuance, the source said.

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