Emerging markets sentiment improves; spreads tighten; IMF begins loan programs; S&P cuts Romania

By Aaron Hochman-Zimmerman

New York, Oct. 27 - Trading in emerging market debt was volatile on Monday amid some improvement with relatively heavy flows.

The market felt like it had "a little more stability," a strategist said.

Central banks, non-governmental organizations as well as the rating agencies kept investors busy as they released major policy decisions.

After a line formed outside its door last week, the International Monetary Fund opened its vault by offering loans to Hungary and Ukraine.

Also, the monetary policymakers in Israel and South Korea cut interest rates, while Standard & Poor's cut Romania's credit rating.

From the major markets, equities in the United States remained mixed throughout most of the session but dropped off late in the day. Volatility added just 0.93 but surpassed 80.00 by finishing at 80.06, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector, emerging markets were able to wrap tighter by 32 basis points to a spread of 823 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Volatility in emerging Europe

Emerging Europe saw a flutter of activity after loan deals focused in for Hungary and Ukraine. Separately, Romania received a rating downgrade.

In Russia, prime minister Vladimir Putin hosted China premier Wen Jiabao on Monday.

The two leaders discussed a closer partnership in the oil and gas trade, including a joint venture to build a pipeline from the Russian city of Skovordino to the Chinese border, the Itar-Tass News Agency reported.

In Turkey, energy minister Hilmi Guler announced an initiative to develop renewable energy in order to cut dependence of foreign energy providers.

"The private sector is quite excited about renewable energy investments," he said, according to the Turkish Daily News.

"The amount of investment in energy has surpassed $30 billion, while 80% of this figure is in renewable energy," he said about the government's contribution to the energy sector.

The government also plans to aid private enterprise in producing clean energy.

"Private sector investment in energy should be fostered and supported," said state minister Mehmet Simsek.

"The incentives may be multi-dimensioned, but the most important incentive is to protect the economic and political stability of the country," he added.

Also in emerging Europe, Romania's bonds were slammed after a downgrade to BB+ from BBB- by Standard & Poor's, a London-based trader said.

The leu was seen trading at 2.971 to the dollar.

IMF to back Hungary, Ukraine

The IMF said it will provide Ukraine with a $16.5 billion two-year standby loan.

Prime minister Yulia Timoshenko has been fighting to postpone the Dec. 14 early elections for fear that the IMF would see the resulting turmoil as too risky to provide the loan.

Also, Timoshenko told reporters that a deal with Russia for natural gas shipments may be achieved next month.

"I think we could sign it in November," she said, according to the RIA Novosti News Agency. "I am certain that we will reach an understanding and sign the necessary documents with the Russian Federation."

The nature of the agreement has not been disclosed, but Ukraine has pushed to keep the price per square meter of gas under $300.

Ukraine currently pays $179.50 per square meter.

Meanwhile, in Hungary the government is expecting to receive the final terms of an IMF assistance package.

The IMF is also in talks to provide assistance to Iceland, Belarus and Pakistan.

LatAm feeling firmer

Latin American markets took a slightly better tone to open the week on Monday.

Still, political volatility was rampant as Argentina continued to weigh its options as it hangs at the brink of default.

In the legislature, discussion began over how to proceed with the controversial pension fund nationalization put forward by president Christina Kirchner.

The administration claims the nationalization will preserve the solvency of the funds, while critics accuse the government of robbing the pensioners.

Elsewhere, Venezuela continued to fight against dropping oil prices.

Light sweet crude was seen trading below $62 per barrel on Monday.

In Brazil, the real jumped as the government sold $2 billion in dollar repurchase contracts, reports said.

Equities on the Bovespa sank, but the real strengthened, trading at 2.253 to the dollar.

Also, the re-election of the right-leaning mayor of Sao Paulo deflated some of president Luiz Inacio Lula da Silva's prestige, reports said.

However, in the Rio de Janeiro elections, the candidate endorsed by Lula, Eduardo Paes, defeated the former revolutionary fighter Fernando Gabeira.

Rate cuts in Israel, South Korea

In South Korea, during an emergency meeting of the central bank, the monetary policy committee lowered the country's base rate to 4.25% from 5%, according to a statement from the bank.

The decision was made "against the possibility of a sharp contraction of real economic activity against the backdrop of the large swings of the exchange rate and stock prices and the partial seizing-up of the credit markets under the impact of the international financial market turmoil on domestic markets," the bank said in the statement.

The bank also committed itself to taking the necessary action to stabilize the won and the Korean financial system.

The won was seen trading at 1,469.57 to the dollar.

Meanwhile in Israel, the central bank cut rates by 25 bps to 3.5%, the bank said in a statement.

"The Bank of Israel notes that in light of the weakening of the transmission between developments in the shekel exchange rate and inflation, it appears that the depreciation of the shekel against the dollar recently has at this stage had only a minimal effect on inflation in Israel," the statement said.

Still, the bank will continue to monitor the situation and take appropriate action.

The shekel was seen trading at 3.823 to the dollar.

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