Emerging markets improve; Argentina's bonds strengthen, lead winners; IMF keeps loan spigot open

By Aaron Hochman-Zimmerman

New York, Nov. 25 - Emerging markets moved on thin volumes on Tuesday as issues were tighter ahead of Wednesday's early close in the United States.

Prices were mildly higher and the tone was improved, but "there's not too much going," a trader said.

In trading, Argentina continued its climb away from its distressed levels by adding 3.35 points to its discount bonds due 2033.

Still, even as a few optimists ached to call a bottom for the market, "it's hard to see this being the end," a strategist said.

The market is at a 7.6% default expectation from Standard & Poor's, the strategist said, making JPMorgan's EMBI Global index spread of 778 basis points, "still pretty low."

At the height of the "dot com" bubble, default expectations reached as high as 10.8%, he said, indicating that the market may have more room to fall.

If default rates hit 15%, the EMBI Global could stretch as wide as 1,100 bps, he said.

"I don't think we're at a bottom yet," he said. "Defaults are just starting to rise."

From the major markets, equities hung close to unchanged most of the day, while volatility ended lower by 3.80 at 60.90, according to the VIX index. The index is a frequently used gauge of market volatility.

Treasuries were climbing on Tuesday, but emerging markets managed to tighten by 8 bps to a spread of 711 bps, according to the EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Gazprom, Russia bonds tighten

Emerging Europe initially reacted well to early strength in U.S. equities, but by London's late-afternoon "it's come off now," a trader said.

The London credit traders were preoccupied with the monetary policy in Washington, D.C., as the Treasury Department proposed another $800 billion injection into the market.

"Generally is seems like people are asking 'where are they getting all of this money?'" the trader said.

"I don't think the equity markets are going to like that," he said. "The dollar is getting killed today."

However, despite a decent amount of tightening, "generally throughout the day, CDS have been very thin, he said.

In Russia, an accord was reached to settle Ukraine's gas debts by Dec. 1, according to an OAO Gazprom press release.

Alexey Miller, Gazprom chairman, hosted Oleg Dubina, chairman of JSC Naftogaz Ukrainy, as they worked Monday night to ensure gas shipments to Ukraine will be uninterrupted through the winter.

Long-term contracts are still being negotiated.

President Dmitry Medvedev had pressed Gazprom to collect its debts from Ukraine where in Kiev prime minister Yulia Timoshenko asked Dubina to find a quick solution to the debt question.

Still, for his part, Ukrainian president Viktor Yushchenko felt that the government, more than Naftogaz chairman Dubina, should play the active role in negotiating oil prices.

"In this setting the president would like the government to take a more active stand at the talks with Russian officials," said presidential spokeswoman Irina Vannikov.

"Aside from it, the president regards as impermissible the turning of the gas problem from the economic into the political one," Vannikov said.

"Gazprom has been tighter," a trader said, as debts were closer to being settled.

The Gazprom five-year CDS was seen trading almost 200 bps tighter at 900 bps bid, 950 bps offered.

Still, weary investors have been looking more to the short-term one-year and three-year maturities, he said.

"Gazprom and Russia have been more in demand," he said, "but you can't really find a good offer."

The Russian government bonds due 2030 were quoted at 83 bid, 84 offered.

Elsewhere in Ukraine, Timoshenko began a legislative push to allow for oil exploration off of the Black Sea coast.

"I would like us to start implementing a large-scale project, including the entire shelf, and including all the components of prospecting and production, and I ask you to launch this as a separate state program," she said, according to the RIA Novosti News Agency.

Timoshenko hopes to fund the project with loans from "world financial institutions," rather than private money, she said.

Currently, the country only produces 20% of its annual energy usage, the report said.

IMF keeps door, wallet open

Also in emerging Europe, Turkey announced that any upcoming deal with the International Monetary Fund would come in the form of a standby agreement.

Amounts between $20 billion and $40 billion have been discussed, but no terms have been finalized.

Prime minister Recep Tayyip Erdogan has been hesitant to allow Turkey to become overly beholden to the IMF.

The Turkish sovereign bonds due 2030 were seen at 133 bid, 135 offered.

Filing in behind Turkey is Latvia, which is expected to ask the IMF for a $2.5 billion loan.

Argentina leads LatAm higher

Latin America moved tighter on thin volumes as investors continued to push a positive tone toward Wednesday's early close.

In Argentina, president Cristina Kirchner met with Mexico's president Felipe Calderon to sign friendship and cooperation agreements with the Mexican leader.

"During this visit we have held meetings to analyze bilateral relations with the purpose of deepening the benefit for both our people," said Calderon, according to the Buenos Aires Herald.

The two discussed trade policies, sharing technology and drug trafficking, the report said.

"The aim is to promote integrated association that will institutionalize legal tools, political agreements, economic and commercial ties, and cooperation in all of our countries' sectors," Calderon added.

The 8.28% Argentine discount bonds due 2033 jumped 3.35 points to 29.85 bid, 30.5 offered.

In Venezuela, Russian naval vessels made call at the port of La Guaira ahead of a series of joint military exercises.

President Dmitry Medvedev will visit with president Hugo Chavez to discuss trade policy on Wednesday, when Medvedev arrives from Brazil.

The 9¼% Venezuelan bonds due 2027 slipped 0.25 point to 65.75 bid, 69 offered.

Meanwhile, during his stop in Brazil, Medvedev held meetings with president Luiz Inacio Lula da Silva.

Lula offered the former Gazprom chairman a tour of Petrobras facilities as the two discussed energy and trade policy.

"The meeting with Dmitry Medvedev is a good opportunity to improve our cooperation on the international agenda issues, mainly as concerns the financial crisis that is gathering pace," Lula said, according to the Itar-Tass News Agency.

Also, the $5.4 billion of trade between the two BRIC nations does "not meet the scale and potential of our countries," he added.

The 11% Brazilian sovereigns due 2040 were quoted at 116.25 bid, 116.95 offered.

Asia up on slow flow

Asia tightened on trickling pre-holiday volumes as investors finalized travel plans for Thanksgiving in the United States.

In the Philippines, government debt servicing increased by 1.4% to PHP 570 billion during the first 10 months of 2008, the Treasury Department said, according to the Manila Times.

Of the total servicing amount, PHP 318 billion was paid against principle and PHP 252 was paid against interest.

The government expects to make PHP 601 billion in debt payments for the year, compared to PHP 854 billion in 2007.

The Philippine government bonds due 2030 were seen at 101 bid, 108 offered.

In Indonesia, after a $90 million cash injection into Bank Century, the bank was back to business on Monday.

Still, Bank Indonesia began a broad scale investigation into violations of banking codes.

Century set new limits for itself in order to comply with new regulations in the wake of the central bank's aid program.

Customers will only be allowed to withdraw 50 million rupiah until the bank builds a cushion of 1 trillion rupiah, in order to comply with Deposit Insurance Agency rules.

"We had to limit the amount of withdrawals so that every depositor could collect their money," said an anonymous source from the bank, according to the Jakarta Post.

Pakistan static on $7.6 billion loan

In Pakistan, a strategist saw little movement on the sovereigns after a $7.6 billion loan was approved by the IMF board.

"It was likely a done deal anyway," he said.

"The IMF has plenty of money and is looking for people to lend it to," he said.

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