Emerging market debt loses momentum as U.S. stocks drop

By Reshmi Basu and Paul A. Harris

New York, July 7 - Emerging market debt lost energy Friday as U.S equities saw red throughout the session.

U.S. stocks saw a sharp decline on the back of surging oil prices, corporate profit warnings and weaker than expected non-farm payroll numbers in the United States, which investors interpreted as signals of a cooling U.S. economy and higher inflationary pressures.

As a result, the Dow Jones Industrial Average lost 134.63 points to close at 11,090.67. Local Latin American equity markets tracked U.S. equities lower. The Brazilian Bovespa index shed 431 points.

Treasuries help limit EM losses

Meanwhile U.S Treasuries rallied on the benign job numbers, data the bond market interpreted as more evidence that the Federal Reserve would pause its current tightening cycle at the August meeting.

The U.S. Labor Department reported that 121,000 jobs were created last month, missing forecasts of 225,000 new jobs.

During the session, the yield on the 10-year Treasury note came down to 5.13% from Thursday's close of 5.18%. Lower Treasury yields helped insulate emerging markets from bigger losses, noted market sources.

The asset class was unable to capitalize on momentum built from Thursday's session, in which the emerging markets closed near the highs of the day, supported by firmer U.S. core markets and the market-friendly result in Mexico's election.

Spreads were almost unchanged for the day on Friday, noted a trader.

During the session, the bellwether Brazilian bond due 2040 added 0.35 to 124.90 bid, 125 offered.

"We had a pretty good tone early on - lost some momentum throughout the day as some of the equity markets sold off throughout the afternoon and took some of the steam off our market," said the trader.

"And then the offsetting thing was the Treasury market rally today [Friday]," he continued.

He described volumes as "average for a payroll Friday" and noted that there were a variety of players from dealers, local managers and asset managers.

Mexico up again

Meanwhile Mexico continued to rally on news that conservative Felipe Calderon has emerged as the winner in the country's razor-tight presidential election. His left-of-center opponent Manuel Lopez Obrador said he would challenge the results.

During the session, the Mexican bond due 2026 gained 1.90 to 151 bid, 153 offered.

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