Emerging markets inch higher; thin volumes prevail; Treasuries stymie tightening; Venezuela lower

By Aaron Hochman-Zimmerman

New York, Dec. 2 - Emerging markets crept slightly higher on Tuesday as equities tried to take back some of what had been lost during Monday's massacre.

"We're still very much hooked at the chest here with the U.S.," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

In recent sessions, emerging markets have traded tightly with the major markets, and before the Christmas holidays "there could be some more volatility," he said, referring to upcoming market data, the evolving U.S. bailout plan and action at many central banks where rates may start falling in order to spur on stalling economies.

"There's plenty in the pipeline," he added.

Still, for most of the sectors on Tuesday "it's steady and quiet," a trader said during London's afternoon.

In trading, Venezuela was damaged by sinking oil prices, even as investors wondered if another supply reduction from OPEC is forthcoming.

The Venezuelan bonds due 2027 sank 1.75 points.

Meanwhile, an equity recovery pushed volatility back down by 5.53 to 62.98, according to the VIX index. The index is a common measure of market volatility.

Investors continued to show more interest in Treasuries as emerging markets managed to tighten by 1 basis point to a spread of 755 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Thin volumes temper Asia

The Asian market was slow but "choppy with equities and everything," a trader said. "The extent of the slowdown is worrying."

"There's not a great deal of volume," he said, but "there's interesting things going on" such as the protests in Thailand, which has underperformed the high-grade credits.

Still, the news has little effect as it is set against a backdrop of very thin volumes.

Elsewhere in the Philippines, the Bureau of Treasury announced that it is willing to accept a proposal from the Senate that would limit 2009 interest payments in favor of social spending, the Manila Times reported.

The Treasury is likely to cut interest payments by PHP 2 billion from the original PHP 303 billion interest fund, treasurer Roberto Tan said.

The Philippine government bonds due 2030 were seen unchanged at 103 bid, 105 offered.

In Indonesia, the Industry Ministry hoped to offer tax incentives to struggling labor-intensive industries, according to the Jakarta Post.

The steel, textile and footwear industries may see a 10% cut to the value-added tax, which would generate $562 million.

The Indonesian sovereign bonds due 2018 added 1 point to 69 bid, 73 offered.

Also in Pakistan, where money from the International Monetary Fund helped to bolster confidence in the credit, the bonds due 2017 were quoted at 40 bid.

LatAm illiquid in quiet session

In Latin America, "we're back to a little bit of illiquidity," said IDEAglobal's Alvarez.

"The bid-offer spreads are pretty wide for some reason," he said, although compared to Monday's equity dump, "the market has held up relatively well."

In cash terms, many issues were up despite wider spreads, which were stretched by Treasuries.

Still, unlike Asia, the Latin American market was light on news as "there's not much cooking in the region," Alvarez said.

However, Argentina faced a similar round of rumors as those which passed through the United States.

As outside speculation that former president Bill Clinton may replace incoming secretary of state Hillary Clinton as the junior senator from New York, interior minister Florencio Randazzo denied that former president Nestor Kirchner would seek a seat in the Senate, the Buenos Aires Herald reported.

"There have been no conversations in which we have discussed the possibility of Nestor Kirchner becoming a senator," Randazzo said.

The 8.28% Argentine discount bonds due 2033 slipped 0.75 point to 29.25 bid, 30.25 offered.

In Venezuela, prices were dropping with the price of oil while the Venezuelan navy along with elements of the Russian fleet conducted military exercises near the edge of U.S. territorial waters, the BBC reported.

The report noted concern in Washington over $4.4 billion in arms deals between the Russians and Venezuelans since 2005.

Light sweet crude was seen trading as low as $48 per barrel as the 9¼% Venezuelan bonds due 2027 fell 1.75 points to 63 bid, 64 offered.

Also in Brazil, the government will begin implementing a program that will ensure that deforestation of the Amazon rainforest will decrease by 70% by the close of 2018.

The 7 1/8% Brazilian bonds due 2037 added 0.5 point to 94 bid, 95.75 offered.

Ecuador on legal high

In Ecuador, the government hired a New York-based law firm to manage its affairs concerning the delayed payment on the 12% bonds due 2012.

The market was comforted by the presence of the law firm, which signifies that by retaining a U.S. law firm they will take "the legal route," Alvarez said.

The 12% bonds due 2012 were better by 3.5 points at 31.5 bid, 35 offered.

Emerging Europe struggles to climb

Emerging Europe remained quiet in the wake of a "dreadful close of the Dow [Jones Industrial Average] during a difficult Monday," a London-based trader said. "It was really a very poor picture."

By Tuesday, "there's really not much going on," he said.

"It's hard work" to get anything done, he added, although corporates recently had been better bid.

The bonds, such as Russia's OAO Gazprom, saw more interest, but that "seemed to disappear again" late Monday and early Tuesday, the trader said.

On the sovereign side, "Russia was trying to perform," he said.

Meanwhile, the Russian government announced gas production hit 54.351 billion cubic meters in November compared to 58.193 billion cubic meters during November 2007, reported the Itar-Tass News Agency.

November fuel exports were also lower at 12.424 billion cubic meters compared to 15.802 billion cubic meters over the same period of 2007, the report said.

Elsewhere in Europe, NATO members' foreign ministers met in Brussels where they discussed greater cooperation with Moscow.

Russia continues to object to the expansion of NATO, especially along its own borders.

The issue has recently been rehashed by the possible extension of a membership action plan for former Soviet republics Ukraine and Georgia.

Also in Ukraine, Gazprom and the national Ukrainian oil firm JSC Naftogaz Ukrainy announced plans to return to the negotiation table on Wednesday.

"The September debt has not been repaid by now. Ukraine has asked for another delay. Negotiations will continue tomorrow," Gazprom spokesman Sergei Kupriyanov said, according to Itar-Tass.

Kiev owes $2.4 billion for past gas deliveries.

Meanwhile in Turkey, the government expects to see a 17% contraction of exports and a 25% contraction of imports, trade minister Kursad Tuzmen said, according to the Hurriyet Daily News.

"We encourage Turkish exporters to look toward Far East, Asia, Middle East and Africa markets as contraction is expected in the markets of European Union countries," Tuzmen told reporters.

Exports are still expected to total $130 billion in 2008, but Tuzmen admitted 2009 will likely see a drop in sales overseas.

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