Emerging markets drown in illiquidity; high-betas dig lower; VTB pulls ruble-denominated offering

By Aaron Hochman-Zimmerman

New York, Sept. 15 - Emerging markets were chopped at the knees on Monday by failing U.S. banks and a 504-point decline in the Dow Jones Industrial Average.

Latin America's high-betas led the retreat as Asia and emerging Europe were only able to fight off the worst of the losses.

Venezuela ran the farthest from its close on Friday by dropping 6 points from its benchmark bonds due 2027.

In the primary Russia's VTB Bank surprised few by pulling its proposed 5 billion ruble bond offering.

"It hasn't been quite this quiet and abstract since 10 years ago when Russia went pop," a trader said about emerging markets.

"To put a positive spin on it: We needed this didn't we?" he asked, relating the credit crisis to a cold.

"We've got to take our medicine," he said.

EPFR Global called the dumping of funds from emerging market bond funds a "classic flight-to-safety pattern," according to a press release.

During the first week of September, investors took $1.08 billion out of emerging market credit.

The figure represents the largest one-week outflow since mid-April 2007, the release said.

"It's a very difficult market," a strategist said.

"We are in a situation where we've seen massive liquidation of portfolios," he said, as well as a "significant amount of wealth erosion."

The massacre in the major markets led volatility up by 6.04 to 31.70, according to the VIX index. The index is a frequently used yardstick of market volatility.

As investors left a vapor trail on their flight to Treasuries, emerging markets was yanked wider by 24 basis points to a spread of 354 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.

LatAm loses big

The ever-building crisis on Wall Street put a wrench in the works of Latin American trading on Monday.

A trader saw "wide bid/ask spreads" and "very little to zero actually trading," he said.

Corporate issues were all lower by 1 point to 3 points, he said.

The key sovereign issues were "led lower by Venezuela getting whacked and Argentina weaker as well," he said.

A strategist saw bottom feeders early in the morning, but any impetus to buy was quickly wiped out as selling and simply holding the ball became the dominant tactics.

Investors were selling anything that would fetch a reasonable bid, he said.

The 9¼% Venezuelan government bonds due 2027 fell 9 points from their high on Friday and 6 points from the close as they were spotted at 77 bid.

Last week the credit was damaged by rising political tensions with the United States, a trader said, "Now ... Who knows?" he asked.

Last week, ambassadors were recalled from both Venezuela and the United States as president Hugo Chavez accused the United States of instigating anti-government forces in Bolivia.

Meanwhile, Venezuela also hosted elements of the Russian military, including Tu-160 Blackjack bombers, as the two countries participated in joint military exercises.

Elsewhere, Argentina's 8.28% discount bonds due 2033 fell 8 points from the high on Friday and 4 points from the close at 63 bid.

Also, Brazil's highly traded 11% bonds due 2040 were quoted at 128.25 bid, 129.25 offered.

The 7 1/8% Brazilian bonds due 2037 sank by 4.75 points to 104.75 bid, 105.25 offered.

Emerging Europe follows banks down

Emerging Europe was damaged across the board as toxicity spread across the ocean from the ports of New York.

A London-based trader at a bank not directly involved in the day's crises joked that his colleagues were busy storing canned food and reinforcing windows and doors.

"There's not much to say in the markets, is there?" he asked.

Turkey's paper remained highly volatile on Monday, but the wild moves only helped prices mimic the rest of the tumult in the financial world.

The Turkish sovereign bonds due 2030 gave up 3 points to 147.75 bid, 148 offered.

Medvedev reassures businesses

For his part, Russian president Dmitry Medvedev said the Russian markets are strong enough to avoid a crisis.

"There is no crisis or pre-crisis situation. We have the necessary strength to resolve all the problems on Russia's domestic market," Medvedev said, according to the Itar-Tass News Agency.

Medvedev also assured the Russian business community at a conference that politics will not harm business interests.

"The economic dependence on the political situation is not considerable, and therefore, in the present situation despite seasonable fluctuations and administrative reshuffles in certain countries Russia's economic politics should remain invariable," he said.

Meanwhile, Russia said it is ready to join the World Trade Organization, but only on conditions it finds satisfactory.

"We want neither confrontation, nor self-isolation. We have had enough in the previous years. Naturally, we shall defend our interests, which, as a matter of fact, do not contravene any other interests," Medvedev said at the financial conference.

The Russian government bonds due 2030 sank 1.625 points to 107.875 bid, 108.125 offered.

VTB pulls ruble deal

VTB Bank (A2/BBB+/BBB+), citing market conditions, pulled a 5 billion ruble issue, "which is hardly surprising in current market environment," a market source said.

The deal was marketed with a quarterly coupon of 10½% to 11%.

The coupon corresponds to a yield to a one-year put of 10.92% to 11.46%.

On June 19, VTB priced €1 billion of three-year 8¼% bonds at par to yield mid-swaps plus 295 bps.

The Russian government holds a majority stake in VTB, a Moscow-based retail and commercial bank.

Asia whacked by externals

Asia suffered through the illiquid Monday with the other sectors but in price terms came out more like its counterparts in emerging Europe rather than the bloodied LatAm sector.

In the Philippines, the central bank announced a 24.6%, or $1.4 billion, increase in overseas remittances for July, according to a news release.

The year-to-date remittance total stands at $9.6 billion after July became the fourth consecutive month of a double-digit growth rate.

Compared to the first seven months of 2007, remittances have grown 18.2% in 2008.

Remittances predominantly come from workers in the United States, Saudi Arabia, the United Kingdom and Italy.

The Philippine sovereign bonds due 2030 lost 1.5 points to 128 bid, 128.5 offered.

In Indonesia, domestic fundamentals, including an economic bounce from the 2009 elections, will help the country weather the external economic crisis, said finance minister Sri Mulyani Indrawati, according to the Jakarta Post.

"If the world's economy is worsening, growth could downsize," he said about 2009.

"However, as domestic economic factors will improve in 2009, the economy may still grow by 6.2%," he added.

Sri Mulyani also noted that the government still predicts 2008 economic growth between 6.3% and 6.4%, despite inflation, which was up 11.85% in August compared to August 2007.

The rupiah was seen trading at 9,138.50 to the dollar.

The Indonesian sovereigns due 2017 gave up 1.375 points to 100 bid, 100.5 offered.

Elsewhere, in Pakistan, paramilitary troops fired warning shots into the air, which deterred U.S. troops from crossing over the Afghan border.

U.S. soldiers, delivered to the volatile border region of South Waziristan, attempted to cross into the Pakistani side on foot but were prevented by the non-lethal fire of the Pakistani soldiers, reports said.

The U.S. department of defense recently authorized American troops to conduct raids into Pakistan in the face of strong criticism from the new Pakistani government.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.