Emerging markets keep positive tone; buyers return to propel relative recovery; Peru sovereign eyed

By Aaron Hochman-Zimmerman

New York, Oct. 14 - Emerging market investors were willing to rejoice even in limited success on Tuesday.

Issues tightened while buyers were able to sift through a market still generally dry of liquidity.

"I guess it wasn't a blood bath," a trader said, comparing Tuesday to the previous week.

"We had the apocalypse last week, that necessary cathartic puke-out," he said, but now the market is happy with what little it is given.

In trading, Peru's bonds slipped as rumors kicked up about a possible $600 million 30-year sovereign offering.

Still, investors did not express a great amount of confidence about the ability of the rumors to materialize.

In the major markets, equities gave back early gains, but volatility only added 0.14 to finish at 55.13, according to the VIX index. The index is a frequently used gauge of market volatility.

Also, U.S. Treasury yields were soaring as the Federal Reserve pledged to assume equity stakes in some of the United States' major banks. Meanwhile, emerging market spreads wrapped in by 96 basis points to a spread of 557 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 market debt.

LatAm floats on liquidity injection

Latin America was "tighter across the board" with "a decent amount of buying coming into the market," a strategist said.

Tuesday continued a positive trend from Monday, when the bond market was closed in New York, but three developmental lenders agreed to inject $9.3 billion into Latin American markets.

The Washington, D.C.-based Inter-American Development Bank pledged $6 billion, the Bogota-based Latin American Reserves Fund offered $1.8 billion, while the Caracas-based Andean Development Corp. pledged $1.5 billion.

The amounts are not solid and may increase in 2009.

The region may see higher rates of growth than the developed world but will suffer, especially as commodity prices remain low, the International Monetary Fund said.

The boost in liquidity is helpful, but "this is not something that is going to be solved on the first day," the strategist said.

"We're going to have a volatile environment" for perhaps another year, although "it's certainly positive," he said about the $9.3 billion injection.

Peru turns rumor mill

"There's talk of a potential new deal in the market," the source said about reports of an estimated $600 million 30-year deal from Peru.

However, "it's just talk," he said.

When asked if an issue from Peru is likely, a syndicate official simply said: "No."

"I do think sovereign issuance will pick up," the official said, but "our market is behind high grade, and high grade is struggling to pull things together."

"Peru would be right to think that it's good to be earlier in the market than later," but the secondary market will not be there to support it. "The market's just not ready yet," the official said.

Meanwhile in Peru, leftist regional governor Yehude Simon was appointed prime minister by president Alan Garcia.

Garcia has become increasingly unpopular with Peru's political left and his choice of Simon was likely intended to placate critics after the resignation of the entire cabinet amid a corruption scandal.

Critics on the right expressed concern about Simon having been jailed over his relationships to left-leaning rebel groups.

Also in Latin America, investors were "trying to unwind high-beta product" as well as covering short on mostly bellwether bonds, the strategist said.

Argentina's 8.28% discount bonds due 2033 were quoted at 42.5 bid, 43 offered, while Venezuela's 9¼% bonds were seen at 64 bid, 64.5 offered.

Also, Brazil's 7 1/8% government bonds due 2037 were spotted at 91.5 bid, 92 offered.

Asia takes what it can

Asia's performance on Tuesday could be considered "good," but "good could just not be a catastrophe," a trader said.

Equities could have sold off drastically on Tuesday after Monday's rally, he said. "The fact that they didn't, I think is a good sign."

In the Philippines, the government rejected every bid during its short-term debt auction on Monday, the Manila Times reported.

The rejected offers would have spiked rates to 6.276% from 5.699% for the 91-day Treasury bill.

The last successful three-month auction took place on July 7.

However, the government did accept bids for PHP 1.2 billion of 364-day paper out of a possible PHP 2.5 billion.

Rates for the one-year notes rose to 6.52% from 6.495%.

"We find the one-year debt paper more reasonable than the shorter-term paper," deputy national treasurer Eduardo Mendiola said in the report.

"It's common knowledge in what's happening in the international market and it[s] impact on the local market," he said.

The Philippine sovereign bonds due 2030 were spotted at 1,009 bid.

In Indonesia, the government joined efforts around the world by securing deposits to ensure confidence in the financial system.

The government will now guarantee deposits up to 2 billion rupiah, up from 100 million rupiah, the Jakarta Post reported.

"The increase will protect 97% of the country's depositors," finance minister Sri Mulyani said, noting that the previous deposit insurance covered 95% of the country's accounts.

"We have seen a possible threat that could disrupt our banking system; that is why we are changing the law," he said.

The Indonesian government bonds due 2017 were seen at 73 bid.

Small victory for Pakistan

Also in Asia, Pakistan president Asif Ali Zardari made his first official visit to China, which he called "The future of the world."

His visit will include a meeting with president Hu Jintao to discuss the economic and military ties between the two countries.

The two leaders are also expected to discuss the exchange of nuclear technology.

The branching out of Pakistan's government to any of the major economies is a good thing for the country, the trader said.

"Anything mildly positive which comes out of Pakistan is a big positive," he added.

The Pakistani bonds due 2017 were quoted at 40 bid.

Emerging Europe improves

Emerging Europe saw the benefits of a drastically improved global financial picture after equities around the world rallied on the tail of liquidity commitments from the world's central banks.

In Russia, the market continued to react positively to a sunnier world financial picture as well as actions taken by president Dmitry Medvedev to calm the frayed nerves of weary investors.

"I have signed a package of laws that was drafted fairly quickly on my instructions and at the government's initiative, passed by the state duma and approved by the federation council," Medvedev said, according to the Itar-Tass News Agency.

Medvedev called for strong coordination and communication between the branches of government handling the crisis.

"The government is beginning to implement these draft laws, and I would like this work to be carried out in coordination with the administration," he said.

The Russian government bonds due 2030 were seen at 93.75 bid, 94 offered.

Meanwhile, in troubled Ukraine, the early elections called for by president Viktor Yushchenko, which would be held on Dec. 7, may be postponed over a budgetary issue, said deputy head of the secretariat of the Ukrainian president Marina Stavniichuk, according to Itar-Tass.

If the $80 million to fund the polls is not approved by Oct. 19, the date will likely be pushed back, Stavniichuk said.

Prime minister Yulia Timoshenko's bloc in parliament is blocking the use of money from the reserve fund which Yushchenko requested for the polls.

Still, "the issues that have to be settled in order to hold an early parliamentary election are largely technical and can be resolved without the parliament," Stavniichuk said.

Also in emerging Europe, Turkey will suffer a slowdown in growth but will avoid a recession, according to the World Bank's country director, Ulrich Zachau, reported the Turkish Daily News.

Economic policies put in place in recent years have shielded Turkey from the greatest extent of the fallout from the global credit crisis.

"In my opinion, Turkey can continue its robust macroeconomic financial and fiscal policies. Turkey has the strength to do this in whichever way it desires," Zachau said in the report.

Still, Turkish exporters will find a weakened market in Europe for their goods, the report noted.

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