Emerging markets follow equity rally; Russia takes ratings cut in stride; Argentina's bonds rebound

By Aaron Hochman-Zimmerman

New York, Dec. 8 - The emerging markets sector hitched its collective wagon to global equity success on Monday as spreads tightened, cash prices rose and sentiment improved.

Still, some investors remained skeptical that the buying was less from new pots of money rather than money intended for short covering and hedging.

The major flow in trading came as the oil producers, such as Russia, were helped by a boost in prices after OPEC announced that a sizable cut in production may come from the cartel's Dec. 17 meeting.

Light sweet crude was seen trading as high as $44 per barrel.

However, it was Argentina's discount bonds due 2033 that led the way up as the issue rode equity enthusiasm to a 3-point recovery from Friday's loss.

Another successful round for equities kept volatility below 60.00 as it dropped 1.44 to 58.49, according to the VIX index. The index is a common gauge of market volatility.

As a sector, emerging markets tightened by 14 basis points to a spread of 740 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm follows U.S. equity

In similar fashion to last Friday's rally, Latin America was driven by a resurgent equity market and optimistic overflow from the United States.

"That's what's going on today," said a strategist, referring to the infrastructure spending package announced by president-elect Barack Obama as well as a likely bailout of the U.S. automakers.

Any money coming into the market is more likely from "buyers of shorts," the strategist said, now that for a short time "the market feels that we have stabilized."

"We're not seeing fresh cash," but mostly hedges, he said.

In Venezuela, as president Hugo Chavez celebrated his 10th year in office, opposition groups gathered to oppose his legislative push to extend presidential term limits.

Chavez may be able to remain in office until 2021 if a referendum, possibly in February, is successful.

Analysts estimate that 50% of the country supports Chavez, but similar referenda have been rejected in the past.

The 9¼% Venezuelan government bonds due 2027 added 0.5 point to 64 bid, 64.5 offered.

In Argentina the 8.28% Argentine discount bonds due 2033 jumped back from a 2-point loss on Friday by adding 3 points to 29 bid, 30 offered.

Meanwhile in Brazil, the highly traded 11% Brazilian bonds due 2040 were better by 2.35 points at 120 bid, 120.25 offered.

Emerging Europe rides higher

Emerging European credits went along for the ride as equities continued to climb away from recent lows.

Russian stocks were climbing on Monday, but Standard & Poor's hit the economy with a rating of BBB, down from BBB+.

Still, the benchmark sovereigns due 2030 initially showed little reaction to the move and even upward motion later in the day.

The new rating, which puts the sovereign debt two steps away from junk status, came as the country's economic levy broke in two places. The central bank has hemorrhaged its currency reserves to fill gaps in the budget while oil prices have plunged since their summer highs.

"The lowering of the ratings on Russia reflects risks associated with the sharp reversal in external portfolio and other investment flows, which has increased the cost and difficulty of meeting the country's external financing needs," S&P credit analyst Frank Gill said in a statement.

The ruble was seen trading at 27.898 to the dollar.

Meanwhile, president Dmitry Medvedev approved a report on the 2007 budget, which brought in a surplus of nearly 1.8 trillion rubles, the Itar-Tass News Agency reported.

The Russian sovereigns due 2030 tacked on 1.25 points to 79.75 bid, 80.25 offered.

In Ukraine, as the country works to comply with western and specifically NATO standards, the typical membership action plan (MAP) may be redundant.

"The speed of the advance to NATO depends on Ukraine alone," foreign minister Vladimir Ogryzko said, according to Itar-Tass.

Ukraine and Georgia were denied entrance into the alliance during a NATO summit on Dec. 2.

In Turkey, as the country nears an agreement for what may be a $20 billion to $40 billion loan from the International Monetary Fund, prime minister Recep Tayyip Erdogan continued to insist that his country will feel only mild effects of the global slowdown.

"We are going to be the least affected country in the world. I am confident," he said, according to the Hurriyet Daily News.

Erdogan has been subjected to criticism for resisting severe economic cutbacks until after his party faces local elections in March, the report said.

A settlement with the IMF is expected in the week after Dec. 15, the Turkish Feast of Sacrifice.

Hungary cuts rates 50 bps

Also in emerging Europe, Hungary's central bank announced a 50 bps rate cut to 10.5%, according to a statement from the bank.

The surprise rate cut came only weeks before the monetary council was set to meet on Dec. 22.

A $25 billion loan from the IMF has served to help stabilize the currency and the economy.

The forint was seen trading at 202.091 to the dollar.

Asia up with equities, aid

Asia looked stronger on Monday as aid money flowed into India's and Indonesia's economies and a better market tone helped continue Friday's rally.

In Indonesia, the government received a $350 million loan from the Asian Development Bank to assist the reformation of the country's banking system.

The loan is intended to allow local governments to have more authority and ease the burden on the central bank, reports said.

In the Philippines, the central bank released its inflation goal for 2010.

"The Bangko Sentral announces an inflation target of 4.5% plus or minus one percentage point for 2010," a statement said.

With price stability as the key objective, "the target holds the BSP accountable for achieving the said target over a two-year period and to communicate more effectively to the public with greater transparency the objectives, the rationale and the methods of monetary policy implementation," the statement continued.

In recent weeks, the fall of commodity prices has tempered high inflation rates, but the bank pledged to consider future actions to ensure stability in the market.

The peso was seen trading at 48.828 to the dollar.

India opens aid faucet

In India, the announcement of a $4 billion stimulus package paired with Saturday's 100 bps rate cut to 6.5% spurred stocks and bonds in the country recovering from the terrorist attacks in Mumbai.

"In order to provide a contra-cyclical stimulus via plan expenditure, the government has decided to seek authorization for additional plan expenditure of up to [$4 billion] in the current year," said prime minister Manmohan Singh, according to his official web site.

"In addition, steps are being taken to ensure full utilization of funds already provided, so that the pace of expenditure is maintained," he said.

The rupee was seen trading at 49.627 to the dollar.

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