Emerging markets inch higher; emerging Europe wraps tighter; Hungary improves; investors watch IMF

By Aaron Hochman-Zimmerman

New York, Oct. 29 - Emerging markets lost steam from the rally pace set on Tuesday but still managed to move forward.

Hungary led winners as it reeled in spreads on the news of a $25 billion loan from the International Monetary Fund and others.

However, a London-based trader attributed the day's success for London's equities to a shortcoming for credit.

"Given the move in bonds, pension funds have to rebalance into equities," he said.

Many funds need to unload 4% of their bond holdings and fill that vacuum by buying equities, likely by Friday, he said.

For now in credit, "the shorts are being squeezed," he said.

If investors are looking to sell, now is the time, the trader said.

"Go ahead and do it, take your loss," he said.

"If you're long, enjoy the ride," he said, but overall, "the trend for me is still wider."

"Lower your risk, stay relatively flat, trade the volatility," he advised.

Meanwhile, equities in the United States gave up early gains after the 50 basis point rate cut from the Federal Reserve.

"The 50 bps cut was already priced in," a syndicate official said.

"Now we've got to wait," he said about the next credit demon, which many believe to be consumer credit in the form of credit cards and auto loans.

Volatility spiked late in the session by 3.00 to 69.96, according to the VIX index. The index is a common gauge of market volatility.

Hungary grabs $25 billion in loans

In Hungary, the government announced it was approved for a loan package from the IMF, the European Union and the World Bank for $25 billion.

Hungary's CDS "tightened viciously" on the news, a London-based trader said.

On Friday, the CDS traded close to 650 bps bid, but during London's afternoon it had tightened to 385 bps bid, or 80 bps tighter overnight, the trader said.

People were obviously encouraged by the news of the loan, but there are still difficult times ahead for Hungary, the trader said.

"It's more of a technical squeeze," he said.

Also in Central Europe, Romania is another country investors have been watching "quite carefully," the trader said.

The country's debt was downgraded to junk on Monday by Standard & Poor's in what the trader considered "a pre-emptive strike."

S&P has recently been accused of being "post-reactive to market moves," he said, adding that when rating actions come, the market responds: "Sorry, it's already priced in, mate."

"I'm not sure it warranted junk status," he said.

Romania has been "an underperformer this week, but it's still tighter on the day," he said, pointing to currency moves.

The leu was seen trading at 28,606.11 to the dollar.

The Romanian five-year CDS was seen trading near 550 bps mid.

Slow emerging Europe tightens

Emerging Europe tightened on very low flows, a trader said on Tuesday.

The category has suffered in recent weeks as the major names such as Russia, Turkey and Russia's OAO Gazprom have tumbled.

"Those spreads are just huge at the moment," the trader said.

In Russia, the nationally held gas producer OAO Gazprom intends to sell its financial arm, Gazprombank, said the company's financial and economics chief, Andrei Kruglov, reports said.

Gazprom is evaluating the worth of Gazprombank and awaiting bids.

The Russian government bonds due 2030 were seen up 3 points at 80.5 bid, 82 offered.

In Turkey, despite financial shockwaves rippling over the globe, the economy remains healthy, said industry and trade minister Zafer Caglayan, according to the Turkish Daily News.

Effects have been felt, but Turkey still insists it does not need the help of the IMF.

"Considering that European markets are the primary export markets for Turkey, it is quite obvious that a likely recession in Europe would definitely impact Turkey's economy to a certain extent," Caglayan said.

The minister said the government is working on plans to support small businesses with up to $650 million in loans.

"We are working on specific action plans to lower the likely affects of the crisis in Turkey. And within the framework of our plans, the small and medium size enterprises, or SMEs, are of crucial importance," he said.

The Turkish sovereign bonds due 2030 were quoted with a 6-point spread at 111.5 bid, 117.5 offered.

LatAm shows strength

Latin American credits pushed higher as the tone remained relatively positive.

In Argentina, talk of a $1 billion peso buyback was not enough to rally Argentina's bonds after the IMF indicated that "there is no way they're going to give Argentina any money," the syndicate official said.

The 8.28% Argentine government bonds due 2033 improved by 0.75 point to 23.25 bid, 24 offered.

Oil prices jumped on Wednesday by $5.50 per barrel to close at $68.20 per barrel.

Venezuela, which has struggled with plunging crude prices, added 1.5 points to its 9¼% bonds due 2027, which were quoted at 56.5 bid, 58 offered.

Also in Latin America, Brazil's 11% bonds due 2040 added 3 points to 113.3 bid, 114 offered, while Colombia's 7 3/8% bonds due 2017 added 1.75 points to 87 bid, 89 offered.

Also, in corporates Mexico's Vitro SAB de CV saw its 8 5/8% bonds due 2012 jump 6.5 points to 29.78 bid.

Asia credit slides

Asian issues were slow to follow the success in emerging Europe and Latin America on Wednesday.

In the Philippines, the central bank reiterated that the local financial crisis was transmitted by toxicity from the United States and other major markets.

"The recent movements in the financial markets reflect that the financial turmoil has indeed moved further away from its epicenter in [the] U.S. and Europe and may be casting a wider net of contagion," central bank governor Amando Tetangco said, according to the Manila Times.

In response, the bank opened a dollar repurchase facility, which will allow banks to reclassify assets to amortized levels rather than fair market value, the report said.

The Philippine government bonds due 2030 dropped 3 points to 90 bid, 93 offered.

Also in Asia, China was ahead of the U.S. 50 bps rate cut as it cut its own one-year lending rate to 6.66% from 6.93% late Tuesday.

The yuan was seen trading at 6.842 to the dollar.

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