Emerging market debt slightly firmer in slow session; U.S. presidential elections calm activity

By Reshmi Basu

New York, Oct. 29 - Emerging market debt edged slightly higher Friday but investors remained mostly sidelined ahead of the U.S. presidential election on Tuesday.

With president George Bush and John Kerry in a dead heat in the polls, trading continues to be muted, said a trader.

"A little activity in the morning but overall after 11 o'clock, just quiet," he said.

The trader added that there was no key driver behind the market's firmer tone Friday.

"People just want to go home. Get this election over with. And start it up again," the trader noted.

During Friday's trading, there were "no major movements at all. Generally, up on the day but no big movements."

The Brazil bond due 2040 was up 1 1/8 to 116.70 bid. The spread on the Brazil C bond was unchanged at 476 basis points.

Russia's bond due 2030 was also unchanged at 246 basis points. The Mexico bond due 2026 widened three basis points to 217 basis points. The Turkey bond due 2008 also moved out three basis points to 311 basis points.

Emerging market debt wrapped up the week unchanged, added a market source.

"No one wants to make heavy adjustments with the polls so tight. "The market is dead."

Election limbo

Emerging markets wants a clean and decisive victory on Tuesday, said the market source.

If the elections are to be dragged out in court, expect a major sell-off, according to Jephraim P. Gundzik, president of Condor Advisers, Inc., which provides emerging market investment risk analysis to individuals and institutions worldwide.

Investors can expect U.S equities, bonds and the dollar to tank, he said.

"It's going to have a big effect on the rest of the world, without a doubt - especially if it's a drawn out process in the courts.

"I think this time around both Republicans and Democrats are pretty much ready to go to court. It's not going be like 2000 when [Al] Gore supporters were scrambling and trying to figure out what to do."

Furthermore, Gundzik believes that people are underestimating the impact of such a court battle on the rest of the world.

"In the last 50 or 60 years, results haven't been contested and now you are looking at a constitutional crisis."

China can do little to slow economy

On Thursday, China's central bank increased the benchmark rate on one-year yuan loans to 5.58% from 5.31% and the rate on one-year deposits to 2¼% from 1.98%, in hopes to cool down its economy.

"In the broader scheme of things, I don't know if China's economy is going to slow down that much," said Gundzik.

There's very little that the country can do to affect its ability to pull in exports from the rest of Asia and to lessen its demand for exports such as oil, which has been a boon to Latin America.

"More importantly, China is switching to import substitution. And that will have a bigger impact in a couple of years on Asian exports."

In reality, China cannot do much to cool its economy because of the political and social implications, according to Gundzik.

"The whole monetary banking system is controlled by the government. It would be a huge leap to assume that they would go cut their own throat. 'Oh we got to pull back credit' - I don't see that happening."

More power for the Kremlin

After two hours of debate, lawmakers approved president Vladimir Putin's plan to replace popular elections of regional governors with a selection process.

"I don't think it's any surprise," said Gundzik. "Putin's project is to centralize power back to the Kremlin after it was decentralized by his predecessors."

This should put upward pressure on oil prices, said Gundzik.

"It's going to put control of production and distribution even more tightly in central government's hands. For economic reasons, they want to withhold oil from the market," he said.

And finally, Gundzik recommends paper in oil producing countries such as Russia and Venezuela.

He noted that in the case of Venezuela the political noise seems to be getting quieter.

"I don't think that there can be a lot that the opposition can do to unseat the president. They've spent all their ammo."

On the other hand he warned investors to be wary of Brazil and Turkey.

"I think Brazil has a curious debt situation.

"I think Turkey is extremely overvalued - way too much good news priced into the market there - not really any margin for disappointment.

"And they have a huge amount of short-term foreign capital," he noted.

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