Emerging markets hurt; high-betas nose dive; Venezuela down; local market action nears irrelevancy

By Aaron Hochman-Zimmerman

New York, Sept. 29 - Emerging markets were pounded by news of the U.S. House of Representative's rejection of the $700 billion bailout package.

The events in Washington, D.C., completely overshadowed any news coming from the emerging economies themselves and drove nearly every issue significantly lower.

"Everyone's just watching this TARP," a trader said about the government's troubled asset relief program.

"I think this is one of those days you see once in a generation," he said.

"There are only sellers, no buyers," a syndicate official said. "Everything's down."

The mood around the market was clearly depressed, but "it's not a panic, but certainly a loss of liquidity," he said.

"It's not a complete collapse," he added, although "it is evident that the liquidity has deteriorated in EM."

Emerging markets looked to Capitol Hill to see where the market would be swept next.

"It's going to be interesting to see what the reaction of the market is," the strategist said.

"What else can drop here?" he asked about market news regarding banks and bombshells from the government.

In trading, Venezuela led the losers again as it gave back 6 points from its benchmark issue due 2027.

Asia retained its relative outperformer status by trading lower by an average of only 1.5 points, a trader said.

Equities were thrashed on Monday as volatility sprang up by 11.98 to 46.72, according to the VIX index. The index is a frequently used yardstick of market volatility.

Investors ran for the shelter of Treasuries as emerging markets were yanked wider by 33 basis points to a spread of 403 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.

Asia takes top honors

"Obviously flows were light and price action was very weak," a trader said.

Still, issues were lower by an average of 1.5 points, which returned Asia to its preferred status among the sectors.

In the Philippines, the government put PHP 6 billion up for auction, divided evenly between six-month and one-year Treasury bills, according to a press release.

The bonds will mature on April 1, 2009 and Sept. 30, 2009, respectively.

If the sale is successful, both will be issued on Thursday.

Meanwhile, the Philippine sovereign bonds due 2030 gave up 1.625 points to 123.5 bid, 124.5 offered.

In Indonesia, many in government and industry expect a gasoline shortage to take a toll on businesses in 2009, the Jakarta Post reported.

Our products will be stained with ash and won't sell at the market if we use coal, and we cannot use diesel fuel LPG (liquefied petroleum gas) because it is too expensive," said Achmad Widjaya, chairman of the Indonesian Ceramics Association in the report.

The shortage is expected to touch the textile industry as well.

"[PT PGN's] move will also affect our set plan to use fossil fuels amounting to 70% of our total energy demand by 2015, with the remaining 30% electrical demand," Indonesian Textile Industry Association secretary general Ernovian Ismy said about the gas company PGN.

The Indonesian government bonds due 2017 dropped 2.5 points to 91 bid, 92 offered.

In Pakistan, the United Nations believes that nearly 20,000 refugees have crossed the border into Afghanistan as fighting between militants in the Bajaur province has displaced up to 300,000 people, reports said.

Venezuela, LatAm smashed

Latin America's high-betas were beaten down on Monday before and after the rejection of the bailout package by the U.S. Congress.

"It's a difficult environment, because the credits are not trading fluidly out there," a strategist said.

Venezuela led the retreat as president Hugo Chavez, who recently returned from a trip to Russia, told a rally in Caracas that he intends to pursue nuclear power.

"We certainly are interested in developing nuclear energy, for peaceful ends of course, for medical purposes and to generate electricity," he said, according to the BBC.

He noted that Venezuela's South American neighbors use nuclear power.

"Brazil has various nuclear reactors, as does Argentina. We will have ours and Vladimir [Putin] told the media: Russia is ready to help Venezuela develop nuclear energy for peaceful ends," he said at the rally.

The 11% Brazilian bonds due 2040 fell 3 points to 124 bid, 125 offered, while the 7 1/8% bonds due 2037 dropped 4.25 points to 104 bid, 107 offered.

The 9¼% Venezuelan sovereigns due 2027 were off by 6 points to 73 bid, 79.75 offered.

In Argentina, president Cristina Kirchner was expected to speak on Monday night about the possibility of restructuring some of the country's debt.

The Argentine five-year CDS was stretched out by 135 bps to 1,080 bps bid, 1,040 bps offered.

"People are buying protection," a syndicate official said.

The 8.28% Argentine discount bonds due 2033 sank 5 points to 58 bid, 59.75 offered.

High-grade issues were spared some of the pain felt by the high-betas.

Mexico's 5 5/8% bonds due 2017 were seen lower by only 0.6 point, but its five-year CDS was wider by 25 bps.

In Peru, 8 3/8% bonds due 2016 fell 2.25 points.

Correa wins referendum

In Ecuador on Sunday, voters supported the constitutional referendum proposed by president Rafael Correa by nearly a 63% margin.

The vote gives Correa greater control over the economy and natural resources as well as the ability to declare some of the country's debt illegitimate.

In terms of spreads and prices, the referendum is almost meaningless, a strategist said.

The only thing that really matters is what happens in Washington, D.C., he said.

The 8% Ecuadorian bonds due 2030 were quoted at 70 bid, 72 offered.

Emerging Europe dragged under

Even before the votes were counted against the $700 billion U.S. bailout package, emerging Europe was in the middle of a losing session.

In Turkey, the government decided to extend the three-day Muslim holiday of Bayram to nine days, the Turkish Daily News reported.

Many believe the economy is too fragile to allow workers a nine-day holiday; others feel the holiday will benefit overall production.

With the support of much of the business community, a law student brought a case to have the decision overturned by the courts.

The suit is still pending.

The Turkish government bonds due 2030 fell 2.375 points at 144 bid 144.375 offered.

Meanwhile in Ukraine, the committee for foreign affairs within the parliament recommended the country continue its cooperation and strategic partnership with Russia.

The friendship treaty, which may expire on Oct. 1, was originally signed in 1997.

In Russia, president Dmitry Medvedev announced a statement of cooperation with visiting South Korea president Lee Myung-bak.

The two leaders pledged to develop "the key areas of bilateral cooperation and the basic principles of cooperation in the international arena," Medvedev said, according to the Itar-Tass News Agency.

The Russian sovereigns due 2030 were seen lower by 2.75 points at 100.5 bid, 101.125 offered.

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