Emerging markets stronger still; October outflows deep; spreads wind tighter; Russia, Turkey rise

By Aaron Hochman-Zimmerman

New York, Oct. 31 - Emerging markets ended a terrible month with a strong week.

The tighter spreads and better liquidity improved the sentiment around the sectors, but "it was all expected," a strategist said.

"A lot of investors said that this is just what they were going to do," he said.

"For anybody who had cash put aside, it's a no-brainer," he said. "There's been some serious bottom fishing."

"How much lower can it get?" he asked, plus as equities rallied and key rates tightened, "the external environment has been a little more favorable."

On Friday, emerging Europe registered a strong day in trading with Russia and Turkey adding 2.5 points and 4 points to their respective benchmark bonds, each due 2030.

Still, during October emerging market bond funds suffered outflows of $1.97 billion, according to EPFR Global.

From the major markets, after the month of wild volatility, the VIX index settled below 60.00 as it lost 3.01 for the day to close at 59.89. The index is a frequently used yardstick of market volatility.

Emerging markets narrowed by 35 basis points to a spread of 620 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 36 bps with a spread of 714 bps.

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

Emerging Europe ends strong

Emerging Europe finished its encouraging week with a stronger tone even as market watchers hedged their optimism with longer-term doubts.

In Russia, the government plans to introduce another round of economic aid to the local market, according to the Itar-Tass News Agency.

"Support should be provided for some sectors of the real economy, we have already named them - it's the agriculture, leasing and agro-industrial complex," prime minister Vladimir Putin said in the report.

When the plan is enacted, "the measures in it will be taken in a piece-meal fashion," Putin said.

The Russian sovereign bonds due 2030 improved by 2.5 points to 87.375 bid, 88.6 offered.

In Turkey, the government continued to insist that the economy is strong even as the lira remained unstable.

Newspapers from around the world noted the severity of Turkey's situation, reported the Turkish Daily News.

The Washington Post wrote that Turkey may "be in need of $90 billion" in financing, while the French Le Monde wrote the country is "running toward disaster."

The lira was seen trading flat to the dollar at 1.546.

The Turkish government bonds due 2030 were better by 4 points at 119 bid, 123 offered.

LatAm up despite outlook

Latin America made improvements even as some of its high-beta credits skirt default.

In Argentina, bonds improved even as Standard & Poor's dropped the ailing country's credit rating to B- from B.

"They should never be above a B minus," a strategist said, noting that the country is infamous for "defaulting every eight to 10 years."

"Everybody just hopes that the pension privatization gets passed," the strategist said.

"If it doesn't, then it'll be hugely negative ... for everything," he said, including a payment on GDP warrants on Dec. 15.

Still, "it is looking as though they will pass it," he said, then "they will have ample funds, at least in the near term."

The 8.28% Argentine discount bonds due 2033 were up 1.75 points from Thursday's close and up 2.125 points from the low as it closed at 25.5 bid, 29 offered.

Elsewhere, Ecuador is also at a greater than 1 in 3 chance of a default, the strategist said.

The country is debating whether or not to increase social spending or service debt, but they may not have much to lose in the case of default, he said.

For a low-rated (B3/B-/CCC) player that has not issued since 2005, "what's it going to cost them?" he asked.

Meanwhile in Venezuela, further gains for oil helped lift the bond prices.

Light sweet crude was seen trading above $68 per barrel on Friday, while the 9¼% Venezuelan government bonds due 2027 added 5 points to 60 bid, 65.625 offered.

Asian central banks tout crisis response

Asia ended a difficult month with stronger flows, better liquidity and tighter spreads on Friday.

Meanwhile, central bankers took a moment to congratulate themselves for keeping the ship steady through the recent choppy waters.

In the Philippines, the central bank released a statement acknowledging the intensity of the global financial crisis in the emerging economies.

"While the downturn is expected to be more pronounced in the advanced economies, growth in emerging and developing countries is also likely to weaken after years of strong performance," the statement said.

The Philippines itself saw a "respectable" 4.6% growth rate for the first half, but "the growth outlook for the whole of this year is one of guarded optimism," the statement continued.

The bank reiterated that inflation concerns continue to ease as commodity prices decline globally.

The bank also said that it did as much as possible to stave off spillover from the major markets and it "will continue to keep a watchful eye on evolving developments and will remain attentive to the need to promote the stability of the banking and financial sector, as well as the strength of domestic economic activity."

The peso was seen trading at 48.879 to the dollar.

The Philippine government bonds due 2030 were spotted at 103 bid, 108 offered.

Also, the central bank of Indonesia released its own statement touting the coordinated efforts of policy makers after an Executives' Meeting of East Asia-Pacific central banks.

"The committee agreed that the prevailing crisis has underlined the importance of stepping up regional cooperation in information sharing and joint monitoring of the impact of the evolving global financial crisis on regional economies and the implications for central banks in the region," the statement said.

The rupiah was seen trading at 11,006.28 to the dollar.

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