Emerging markets crushed; Brazil approaches critical level; South Korea offering waits for Monday

By Aaron Hochman-Zimmerman

New York, Sept. 11 - Emerging market debt trading seemed to suffer more from equity weakness than equities did.

"Our [emerging] markets continue to look at a difficult environment with the financials in the U.S.," a strategist said, yet the Dow Jones Industrial Average ended better by 164 points.

Still, "we have lost a significant amount of liquidity," he said, and "risk aversion has increased."

"It's very difficult for the market to get any traction."

Without that traction the high-betas were thrown lower in trading, especially in Latin America where the benchmarks of both Argentina and Venezuela were hit for 1.75 points.

Meanwhile, Brazil crept toward a tipping point that, if crossed, may drag down the entire sector.

In the primary market, the choppy and skittish market compelled South Korea to push its new sovereigns to a possible pricing on Monday.

Meanwhile in the major markets, volatility bounced throughout the day but ended lower by 0.13 at 24.39, according to the VIX index. The index is a standard measure of market volatility.

As a sector, emerging markets only widened by 6 basis points to a spread of 336 bps, according to JPMorgan's EMBI+ index, but the number was enough to represent a new wide for the year. The EMBI+ determines the amount of extra yield investors will require to hold assets in emerging markets debt.

Markit to debut new CDX LatAm

Markit Group Ltd., of CDX and iTraxx fame, is preparing to launch a new index, according to its web site.

The CDX LatAm, scheduled to debut on Sept. 22, "will be comprised of 20 equally weighted reference entities from Brazil, Mexico, Argentina, Chile, and Venezuela," the web site said.

A strategist wondered why the company was debuting this product under the current market conditions.

A spokesman for Markit said the company would comment about CDX LatAm after its debut.

'More of the same' in Emerging Europe

Emerging Europe was pushed backward under the pressure of "just more of the same," a strategist said.

Also during London's session, credits did not trade with the benefit of the rebound in equities, which came later in New York's afternoon.

Turkey's still volatile, yet generally outperforming, issues were seen lower by traders.

The Turkish sovereigns due 2030 fell by 1.5 points to 150 bid, 150.5 offered.

Meanwhile in Russia, president Dmitry Medvedev asked the cabinet and central bank not to hesitate to divert funds to the financial market, the Itar-Tass News Agency reported.

Despite a recent spate of losses, "the current situation in Russia's financial market is a temporary phenomenon and the national stock market remains promising," Medvedev said in the report.

The Russian government bonds due 2030 dropped 1.125 points to 109.375 bid, 109.625 offered.

The Russians are coming to LatAm

The Russian military also announced that a flight of Tu-160 Blackjack bombers arrived in Venezuela on Thursday for joint exercises.

The Blackjack is widely believed to be a copy of the U.S. air force's B-1B Lancer.

"A couple of Blackjacks visiting, that's a bad thing," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

President Hugo Chavez has "turned a few head fakes into reality," he said.

In a general way, the exercises also increase Russia's presence in the Western hemisphere, a strategist said.

Venezuela's credits also traded amid falling oil prices.

Light sweet crude was seen trading as low as $100 per barrel.

The 9¼% Venezuelan government bonds due 2027 sank 1.75 points to 87.75 bid, 88.25 offered.

Also in Latin America, Ecuador continued to be pounded, by falling oil and fallout from statements by president Rafael Correa.

"Correa is playing both sides of the aisle on social spending," Alvarez said, referring to remarks he made during a radio interview, which alluded to defaulting on debts in favor of social programs.

The 8% Ecuadorian sovereigns due 2030 were flat at 83 bid, 84 offered.

Elsewhere, "Argentina can't find a buyer" as a result of "that window-dressed CPI figure they put out [on Wednesday]," Alvarez said.

The statistics agency Indec reported a 0.5% rise in the consumer price index during August, while most economists feel the actual number is much higher.

"It's a very difficult environment for Argentina," the strategist said.

"There's lots of talk over whether or not they will pay their Paris Club debt," he said.

The 8.28% Argentine discount bonds due 2033 gave up 1.75 points to 67 bid, 68.65 offered.

In corporates, Mexico's Vitro SAB de CV's 9 1/8% notes due 2017 fell 1.25 points to 78 bid.

Brazil nears critical levels

Another bad day for Brazil, pushed its paper down toward "very important price levels," Alvarez said.

If the value slips through key support levels, "the rest of the market is going to go with it," he said.

The 8¼% Brazilian bonds due 2034, "a key for the market," lost 1.5 points to 121.7 bid, 122.5 offered, he said.

The 11% Brazilian bonds due 2040 were lower by 0.65 point to 130.75 bid, 131 offered.

"Brazil is very relevant in my opinion," Alvarez said.

South Korea delays, Asia wider

Asia also was stretched wider as the market pushed farther away from new risk.

South Korea pushed the pricing of its new 10-year benchmark-sized sovereign bonds until Monday at the earliest, a buysider said.

"Underwriters are now asking for feedback from roadshow participants," he said, but it is unlikely any announcements will come before Monday.

Also in South Korea, the central bank decided to leave its key interest rate unchanged at 5.25%.

The won was seen trading at 1,112.29 to the dollar.

In the Philippines, consumer confidence fell in the third quarter over fears of inflation, the central bank said in a statement.

The confidence index ended at 52.8% and was lower by 9 index points compared to the third quarter of 2007, according to the bank's release.

Still, the index showed a positive trend for the year, said bank governor Amando Tetangco.

The index added 1.8 points compared to the second quarter of 2008.

The peso was seen trading at 47.192 to the dollar.

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