Emerging markets improve; buyers return to all sectors; spreads pull tighter; Venezuela bonds sink

By Aaron Hochman-Zimmerman

New York, Oct. 24 - Emerging markets closed a painful week on a positive note on Friday.

Buyers crawled out from hiding as "things just got ridiculously cheap," a strategist said.

The tone around the market was decidedly improved and investors even saw more upside for the week of Oct. 27.

"The Fed begins its commercial paper buyback program on Monday; that's positive," the strategist said.

"Monday we'll probably have a good day," he said.

Meanwhile in trading on Friday, issues were up across the board with a notable exception in the oil producers.

Oil was pounded again as demand slipped on recession fears and Venezuela's benchmark bonds due 2027 sank 7 points.

Also, throughout the week, all the emerging market funds tracked by EPFR Global suffered outflows "as previously overlooked flaws, ranging from shaky public finances to heavy reliance on commodity export, received plenty of attention," an EPFR press release said.

From the major markets, a jump in volatility of 11.33 left the VIX index just shy of 80.00 at 79.13. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets managed to tighten by 2 basis points to a spread of 855 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 3 bps with a spread of 868 bps.

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

Emerging Europe sheltered from storm

Emerging European credit far outpaced equities on Friday sending traders home for the weekend with a more cheerful sentiment.

"Equities looked dreadful," a trader said, but "our market, since lunchtime looked pretty damn good."

Credit was "pretty bad this morning," he said, but ended "not materially lower."

"I think there have been some buyers," he said, whether or not the bottom feeding will last remains to be seen.

The major issues, Russia and Turkey, bounced back 100 bps from their wides, he said, adding that the market may have "established some kind of bottom for now."

Still, "Russia was doing great this afternoon and it's still through 1,000 [bps]," he said. "That tells you all you need to know."

Trading in the region's other major issues, Ukraine and Kazakhstan, has nearly dried up along with their liquidity.

Despite the successes, if next week we come back and have another week like this "it's all going to collapse," he said.

In Russia, president Dmitry Medvedev selected envoys to represent Russia before the unrecognized governments of South Ossetia and Abkhazia.

The Russian government bonds due 2030 were seen at 76 bid, 76.5 offered.

Also in emerging Europe, Turkey's bonds due 2030 were quoted at 101 bid, 104 offered.

Ukraine PM's party blocks session

Meanwhile in Ukraine, the parliament's session opened on Friday to an immediate work stoppage while prime minister Yulia Timoshenko and president Viktor Yushchenko held negotiations over a number of budget crisis measures, including $80 million for the proposed early elections slated for Dec. 14.

Timoshenko's supporters again blocked the podium and barricaded the presidium with chairs, the Itar-Tass News Agency reported.

"Not only is [the Yulia Timoshenko bloc] blocking the parliament's work, it is also trying to sabotage the vote-count system," said opposition leader Anna German of the pro-Russian Party of Regions.

Timoshenko and her supporters "do not want early elections, because they know they will lose. That is why they are trying to keep office by all means," German said in the report.

Timoshenko claims that early elections will create enough political strife to cost the country a possible $15 billion loan from the International Monetary Fund.

The Ukrainian five-year CDS was seen trading at 2,500 bps bid, 3,000 bps offered.

Asia 'feels better'

Asia was spooked by the "devastation going on in the stock markets," a trader said, but when the dust cleared there was "a lot more appetite for taking risk."

It was difficult to determine the cause of the buying spree, although "a lot of it is short covering," he said.

Still, "there're also some outright buyers in cash bonds," he said.

"The market feels better ... Stuff is kind of bottoming," he said.

In recent sessions, there has been outperformance in Malaysia and Thailand, which have "a better financial mix," he said.

"Indonesia has stopped somewhat," he said. The credit "had a lot of weakness in the last 10 days or so, but it seems to be settling down."

Also in Indonesia, exporters are focusing their attention away from markets in the United States and Europe in order to avoid the effects of the global financial crisis, according to the Jakarta Post.

"New Zealanders, who have money to spend, are placing increased emphasis on quality and durability. I think Indonesian products still have potential to penetrate New Zealand markets, said David Catty, director of the Asean and New Zealand Combined Business Council.

Two-way trade between Indonesia and New Zealand stands at $2 billion, the report said.

The Indonesian sovereigns due 2018 gave up 1 point to 55 bid, 58 offered.

In the Philippines, government borrowing hit PHP 26 billion in September, cutting the total for the first nine months of 2009 by 1.06% to PHP 392 billion from PHP 396 billion, reported the Manila Times.

Of the total, PHP 341 billion was borrowed in domestic markets, while the remaining PHP 51 billion was borrowed internationally.

The Philippine government bonds due 2030 dropped another 5 points to 75 bid, 80 offered.

Pakistan continued to suffer as it dropped 4 points from its bonds due 2017, which traded at 32 bid, 36 offered.

Elsewhere, the 10 members of the Association of Southeast Asian Nations as well as China, Japan and South Korea announced an $80 billion swap program in order to support the region's currencies.

Under the plan, each country will be able to tap into liquidity from the fund in emergency situations.

The South Korean five-year CDS traded wider by 85 bps at 660 bps bid, 680 bps offered.

The won was seen trading at 1,431.09 to the dollar.

LatAm climbs, Venezuela slides

Latin America performed well as market insiders began to wonder: "How much farther to the downside can you go?" a strategist asked.

"I've been hearing from a lot of investors that prices are beginning to look fairly attractive," he said.

Venezuela issues were unable to benefit from the day's recovery as oil prices continued to dive.

OPEC cut production by 1.5 million barrels per day. The reduction fell 500,000 barrels short of the market's expectation.

"If they cut by 5 [million barrels per day] that probably would have an impact," the strategist said.

Still, light sweet crude was seen trading below $63 per barrel.

The 9¼% Venezuelan government bonds due 2027 sank by 7 points to 51 bid, 51.375 offered.

In Argentina, investors still showed little interest in the depressed levels.

"Everyone's been burned so many times on Argentina," he said.

The 8.28% Argentine discount bonds due 2033 were better by 1 point at 24 bid, 25.5 offered.

Also in Latin America, Brazil's 7 1/8% sovereigns due 2037 also improved by 1 point to 75 bid, 78.25 offered.

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