Emerging markets mixed; investors stew on U.S. bailout; high-betas slide; Argentina bonds weaken

By Aaron Hochman-Zimmerman

New York, Sept. 25 - Emerging market trading was held up by investors waiting to gauge the reaction to the announcement from Capitol Hill leadership that the U.S. bailout package could be ready to face the scrutiny of a vote in both houses of Congress.

The emerging market reaction was subdued at best as many investors felt that a strong push in either direction from the emerging sector would have already shown itself.

Despite, the possibility of a market awash in new liquidity, the high-betas in Latin America led the way lower for much of the market.

Argentina's bonds lost more of the gains built around the prospect of a debt restructuring program as the benchmark discount bonds due 2033 fell 1.5 points.

The credit market continued to struggle, but the bailout helped return confidence to the equity market on Thursday.

Volatility fell 2.37 to 32.82, according to the VIX index. The index is a commonly used gauge for market volatility.

The confidence in equities also saw investors back away from Treasuries and send emerging markets tighter by 8 basis points to a spread of 365 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm high-betas battered

The news of a deal to send the bailout package to a vote supported equity traders, but "I don't think LatAm is overwhelmed by it," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"The bailout has cheered the currencies along the region," he said.

"Brazil is a little firmer" as its 7 1/8% government bonds added 0.75 point to 106.5 bid, 107.35 offered.

However, "the high-beta attack continues," he said.

In Argentina, strikes began across Buenos Aires as teachers and railroad workers walked off the job in search of better pay and working conditions.

The railroad workers left more than 1 million passengers stranded with their 11-hour strike, which was inspired by a call for greater security after protestors set train cars ablaze Monday, the Buenos Aires Herald reported.

The teachers rejected a 17.5% pay increase and began their own two-day strike.

The 8.28% Argentine discount bonds due 2033 sank 1.5 point to 64.5 bid, 65.5 offered.

"Argentina has not been able to make more of an impression on the market with the restructuring," Alvarez said.

Also in Latin America, jittery investors prepared for Ecuador's Sunday referendum, which is likely to grant president Rafael Correa greater power over the economy as well as a greater ability to withhold debt payments.

Investment-grade Mexico, which usually tracks U.S. Treasuries, held up as Treasuries fell.

The 5 5/8% Mexican bonds due 2017 added 0.75 point to 99 bid, 99.25 offered.

Venezuela holds above high-beta 3

Meanwhile, "among the three more defensive high-beta credits, Venezuela has done the best," Alvarez said, as it has outperformed Argentina and Ecuador.

On Wednesday, president Hugo Chavez was in Beijing to sign a series of energy deals with China worth $12 billion and which may triple oil sales to 1 million barrels per day by 2012, reports said.

The two also committed to building a joint refinery in Venezuela.

"China is a giant, a super-giant which needs more energy," Chavez said at a press conference.

Still, getting the oil out of the ground and to China is a "pretty intense logistical problem," Alvarez said.

Further, Chavez's relationship with Russia is more troubling for Venezuela's long-term outlook, he said.

There are agreements for Russia to help Venezuela develop nuclear energy technology, "energy in quotations," Alvarez said, implying a nuclear weapons program, and "that's bad news for foreign investors."

"I just don't think that's good news," he said, although "to a certain degree he's using it as a political distraction."

The 9¼% Venezuelan government bonds due 2027 ended unchanged at 82.25 bid, 82.75 offered.

Asia tightens into close

Asia stopped much of its selling by the afternoon and "generally sounds better today," a trader said on Thursday afternoon, adding: "The hedging instruments are tighter," although "it's the thinnest day of the last couple weeks."

"The general themes have been heavy liquidations in the cash markets," he said.

"Indonesia has taken the worst of it," he said, as the Indonesian bonds due 2017 fell 1.5 points to 92.5 bid, 93.5 offered.

Also, in the week since Sept. 28, the Indonesian bonds due 2018 have given up 4 points.

The Philippines has seen the liquidations "to a lesser extent," he said.

Meanwhile, the government debt-service payments increased by 4% to PHP 477 billion from PHP 459 billion during the first eight months of 2008, compared to the same period during 2007.

Principal payments rose 2% to PHP 271 billion, while interest payments rose 7% to PHP 205 year over year in 2008.

Despite the increase the government expects the full year's debt payments to fall short of 2007's level, according to the Manila Times.

The treasury department estimates that it will pay off PHP 601 billion in debt, compared to PHP 854 billion in 2007.

The Philippine government bonds due 2030 added 1 point to 126.5 bid, 127.5 offered.

In Pakistan, U.S. and Pakistani soldiers traded fire across the border with Afghanistan, according to some reports.

Other reports only suggested that Pakistanis fired on American OH-58 Kiowa reconnaissance helicopters. The countries disagree over which side of the border the Kiowas were on when the shots were fired.

No casualties or equipment damage was reported on either side.

Talks continue to soothe the tensions in the remote border area.

"It's just a nasty combination" of fundamental and geopolitical difficulties, the trader said.

The Pakistani bonds due 2017 were seen at 45 bid, 50 offered.

Better tone for Emerging Europe

Emerging Europe felt stronger but was subject to early selling before the groundswell of confidence hit the market over the possibility of a finalized bailout package from Washington, D.C.

In Russia, the equity markets were again free to sell short after regulators lifted a ban, a U.S. equity trader said.

Also, prime minister Vladimir Putin said his country will eventually restore diplomatic relations with Georgia.

"It would be wrong to leave Georgia to the mercy of nationalists and irresponsible people. It is necessary to maintain contacts with the civilian society of this country," the Russian prime minister stressed," he told the Itar-Tass News Agency during a meeting with regional United Russia party leaders.

Also in the commonwealth of independent states, a Fitch Ratings downgrade to BB- stung Ukraine's bonds on Thursday.

Political tension filled the market as the Yulia Timoshenko bloc, the Vladimir Litvin bloc and the president's Our Ukraine-People's Self-Defence bloc attempted to form a coalition, Itar-Tass reported.

One of the major breakthroughs in negotiations was an agreement to work to find a common reaction to the Russian invasion of Georgia, the report said.

However, the major issue of presidential power still stands in the way of a new coalition.

The instability has affected the currency as well. The hryvnia was seen trading at 5.0815 to the dollar.

In Turkey, the typically reserved European Union spoke out against government censorship after prime minister Recep Tayyip Erdogan called for a boycott of the opposition media company, the Dogan Group.

"We are watching the heated debate between the government and the Dogan Group very closely," E.U. representative Marc Pierini told the Turkish Daily News.

The E.U. is working on an accession progress report, but still has many questions about the country's political and economic stability, as well as the population's desire to join.

"Successful accession of the country is achieved when you have a drive in the country, a collective drive, a consensus about accession," Pierini said in the report.

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