Emergency Fed cut rescues EM; prices end mixed to lower; Kexim attempts new issue

By Aaron Hochman-Zimmerman

New York, Jan. 22 - Emerging markets was knocked over backwards as the market opened after the three-day weekend in the United States.

As the Federal Open Market Committee stood on the outside looking into a worldwide market bloodbath Monday, it prepared to announce an emergency rate cut of 75 basis points on Tuesday morning.

"...Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the Fed announced in a written statement.

A market source indicated that economists at UBS and JP Morgan still predict a 50 bps cut on Jan. 30, with another 25 bps reduction in March.

The market has finally come off of its hinges, a market source said.

However, as a short-term play, emerging market CDS is still outperforming, the source said.

"It was a crazy day, put it that way," a trader said with a sigh of relief.

Meanwhile Export-Import Bank of Korea announced a global note issue to be denominated in Mexican pesos. Merrill Lynch will act as the bookrunner for the deal.

Volatility rifled skyward at the open to the tune of approximately 11 points, but calmed in midmorning and closed up only 3.83 at 31.01, according to the VIX index. The index is a commonly used gauge of market volatility.

With a scramble for Treasuries, emerging markets blew out 19 bps wider to a spread of 292 bps, according to the JP Morgan EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to keep money in emerging markets debt.

LatAm plummets, bounces back

Latin American credits were knocked to the ropes along with equities early in the day as the holdover from Monday's world market dive took its toll.

"Since then it's tightened," a trader said, "the Dow [Jones Industrial Average] rallied 400 points."

"We're a little wider than we were on Friday," he said.

"It feels like there's some support to take it a little higher," he said, but "it's still friggin' ugly out there."

Meanwhile in news from the region, Argentina is close to the limits of its electrical capacity, a market source said.

High temperatures and soaring air conditioner usage have caused blackouts which have affected industrial and retail power customers, the source said.

On Jan. 8 power demand hit 17,885 megawatts, which is only 2.5% below a record high output when the government was forced to restrict power to industry.

Demand on the system grew 5.6% in 2007, another source said.

In trading, the Argentine 8.28% discount bonds due 2033 were up approximately 0.75 to 93.25 bid, 94.25 offered.

In Venezuela, president Hugo Chavez announced that he may nationalize farms in order to ease food shortages.

Farmers have found better prices across Venezuela's borders, leading to shortages and price hikes. On a television broadcast, Chavez suggested it may be necessary to use the army to repossess farmland.

The 9.25% Venezuelan bonds due 2027 were quoted flat at 100 bid, 100.5 offered.

Many major fund groups backed away from Brazil in the middle of the last quarter, including emerging market bond funds and Latin America funds, according to EPFR Global.

Also, another large natural gas field has been discovered off the coast, according to the state-run oil firm Petrobras.

The new field called, Jupiter, may match the size of the recently discovered Tupi field.

"It traded OK, definitely not tighter," the trader said about Petrobras.

"Everyone knows what a great company Petrobras is, the question is do you want to own anything," he said.

The 11% Brazilian bonds due 2040 were spotted at 134.1 bid, 134.15 offered.

In corporates, Brazil's Companhia Vale do Rio Doce's (CVRD) possible takeover of Swiss-based Xstrata "sounds like it's going to be tough in this environment," a trader said.

The approximately $90 billion transaction would be one of the biggest deals involving an emerging markets company, the trader said.

Battered Asia shows promise

In Asian activity, a trader said: "The market opened with one of the weakest tones I have ever seen."

Names trading in Asia markets were "off 10% across the board for the last two days," he said.

There are obviously still fears of over the prevailing macroeconomic winds, but there is a possibility for some rallies in the short-term, he said.

In the Philippines, rising domestic demand for debt should be able to help balance out the fading external demand and mounting inflation, a market source said.

The stock market in the Philippines was battered on Monday and Tuesday, like many around the world.

Tuesday's 5.5% loss was the worst single-day performance since August, 2007, the Manila Times reported.

The peso was seen trading at 41.12 to the dollar.

The Philippine bonds due 2030 dropped 0.625 to 130.625 bid.

Indonesia's near-term growth will benefit from continue to benefit from rising consumption and investment, even as inflation concerns persist, a market source said.

The Indonesian sovereign bonds due 2018 fell 0.5 to 101.5 bid, while the bonds due 2038 slipped 0.25 to trade at 104.125 bid.

In Pakistan, clashes intensified over the weekend as the government claims the military killed 37 pro-Taliban fighters in the South Waziristan region.

The lightly trading Pakistani sovereigns due 2017 were quoted at 82 bid.

High grade Kexim announces deal

With high market volatility the pipeline will be hard pressed to produce new paper unless issuers are willing to offer a hefty discount, a trader said.

"If it were a little more stable maybe," he said.

"They're clearly going to come at a discount," a trader said about any proposed new deal under the current environment.

There was little to no action surrounding deals already in the market from Colombia's Empresa de Telecom de Bogota or the Dominican Republic's Grupo M.

Still, high grade issuer Export-Import Bank of Korea (Aa3/A/A+) announced a global note issue to be denominated in Mexican pesos.

Merrill Lynch will act as the bookrunner for the deal.

Proceeds will be used for general operations and debt refinancing.

Kexim is a Seoul-based state-owned bank.

Emerging Europe holds in

Emerging Europe managed to remain collected in trading on Tuesday, rebounding from earlier troubles.

Russia's OAO Gazprom expects that the recently approved South Stream pipeline to southern Europe will be operational by 2013, the Itar-Tass News Agency reported.

The pipeline will flow through Serbia, which also agreed on Tuesday to allow Gazprom to buy a majority stake in its state-run oil company, Naftna Industrija Srbije (NIS).

Gazprom also arranged last Friday for the pipeline to travel through Bulgaria.

The pipeline is expected to handle 30 billion cubic meters of fuel per year.

Also, the central bank forecast the ruble to gain ground on the faltering dollar in 2008, according to a market source.

The ruble was seen trading at 24.623 to the dollar.

The Russian sovereign bonds due 2030 added 0.375 to trade at 115.625 bid, 115.75 offered.

Elsewhere, the Russian Foreign Ministry told the RIA Novosti News Agency that it would take "appropriate measures" if Ukraine became a member of NATO.

Last week the Kiev government sent a letter stating its intention to ask for admittance into the alliance.

The Ukrainian bonds due 2016 were quoted at 100.1 bid, 100.8 offered.

In Turkey, the stock market's benchmark IMKB-100 index dropped over 6% in Monday's hectic trading. The market closed at 45,554, down by 3,113 points, according to the Turkish Daily News.

The Turkish government bonds due 2030 were quoted higher by 0.2 to trade at 155.7 bid, 156.2 offered.

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