Emerging markets mixed to stronger; late day rally makes up some loss; primary comatose

By Aaron Hochman-Zimmerman

New York, Jan. 31 - Emerging markets was able to rein in some of the day's early wides with a modest late-day recovery spurred on by greater confidence in MBIA, Inc. from the equity side.

External markets continue to drive emerging markets, a strategist said about the news from bond insurer MBIA.

Meanwhile, fellow bond insurer FGIC was downgraded to AA from AAA by Standard & Poor's.

"Nobody had time to react to the downgrade ... that might impact the market tomorrow," he said at the end of Thursday's session.

There is some good news, the strategist said.

"Earnings season is drawing to an end," he said, and "The Fed and the White House are going to take aggressive action to curtail the likelihood of a recession in the U.S.

"On the negative side, bank balance sheets are under pressure," he continued.

With emerging markets dependent on their external counterparts, "our spreads are going to be dragged wider," he said.

Only echoes of deals past where heard in the emerging market primary, but trading highlighted Argentina, which led the losers by dropping 1.75 from its discount bonds due 2033.

Volatility opened high, but eased as equities performed well into the afternoon. The VIX index closed lower by 1.42 at 26.20. The index is a frequently used yardstick of market volatility.

Emerging markets widened against resurgent Treasuries by 14 basis points to a spread of 277 bps, according to JP Morgan's EMBI+ index. The EMBI+ reflects the amount of extra yield investors demand to keep assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns was wider by 13 bps to a spread of 301 bps.

The diversified index has a less strict liquidity rule for inclusion.

Emerging Europe mixed, choppy after Fed

Trading in emerging Europe did not react especially well to Wednesday's 50 bps cut from the Federal Reserve, a trader said.

Sentiment was on shaky ground as prices were "a bit mixed," he said.

"I thought the market would get better off the back of equities," he said. "But that was completely wrong.

"South Africa is the one that probably stands out," he said, as the parliament held a special session to deal with the country's persistent energy crisis.

The government-run power firm Eskom is following a series of rolling blackouts which have already shut down much of the country's mining and other industries and may begin to disrupt long-term economic forecasts.

South Africa's five-year CDS was wider by 10 bps and its government bonds due 2017 were spotted down by 1.25 at 120.25 bid, 120.75 offered.

Russia's finance ministry, central bank and ministry of economic development and trade all have different, yet ineffective approaches to keeping inflation in check, said prime minister Viktor Zubkov on Thursday, according to the Itar-Tass News Agency.

As inflation rises, so will wages, pensions and military stipends beginning at the end of February.

The money has already been accounted for in the year's budget, said deputy prime minister and finance minister Alexei Kudrin.

Also, basic food prices will not increase until May, according to an agreement signed between the agriculture ministry and the country's largest food producers.

The 10% food surcharge cap which was set to expire Thursday will now be extended until May.

The Russian sovereign bonds due 2030 added 0.375 to trade at approximately 115.25 bid, 115.375 offered.

In the Ukraine, president Viktor Yushchenko asked the country's political and economic leaders to reach a consensus for a long-term economic policy, the Itar-Tass News Agency reported.

Yushchenko asked that various interests come together to make the economy more transparent, cut taxes, clean up corruption and encourage foreign investment of up to $8 billion in 2008.

The Ukrainian sovereigns due 2016 gained 0.875 to trade at 100.75 bid, 101.25 offered.

Turkey's city of Adana held a construction fair on Thursday to encourage foreign investment in the fast-growing southern city, the Turkish Daily News reported.

With its rising population the city expects the need for new infrastructure including new roads, bridges and buildings.

The Turkish sovereigns due 2030 were quoted up 0.2 at 156.875 bid, 157 offered.

LatAm struggles in macro quicksand

Latin America fell back slightly as light volumes persisted in what a strategist called "a cyclical bear market."

Investors will have to play the market tactically and avoid leaving assets in countries which are more likely to be downgraded, he said.

"Brazil is more likely to be upgraded than downgraded," he said.

On the other hand, "El Salvador is more likely to be downgraded than upgraded," he said, based on its dependence on remittances from overseas workers which are predominantly employed in the construction industry.

"Same with Romania and Bulgaria," he added, marking European countries for potential downgrades.

The ban against Brazilian beef began on Thursday, as the European Union was uncomfortable with the reporting of the health of the country's cattle.

The 11% Brazilian bonds due 2040 slipped 0.1 to 134.15 bid, 134.25 offered. The 7.125% bonds due 2037 lost 0.4 to trade at 109 bid, 109.6 offered.

Argentina's discount bonds led the losers even as equities posted an afternoon rally.

The Argentine 8.28% discount bonds due 2033 were off by 1.75 to close at 91 bid, 91.6 offered.

Venezuela's 9.25% sovereign bonds due 2027 added 0.25 to trade at 100.5 bid, 102.25 offered.

Asia firms up in afternoon

Asian credits had a day of two halves, a trader said.

The "rocky tone" in the early hours came from a combination of weak overnight trading in Asia, "Asia was particularly weak," he said.

Plus, the fear of an MBIA downgrade "sent a lot of jitters through the market," he said.

The reassurances of MBIA's chairman and chief executive officer, Gary Dunton calmed the market and "clients started to put money back to work," he said.

"Tone was a lot stronger towards the end of the day," he said.

"We haven't hit the bottom just yet, but it's just that much more constructive each day," he added.

In the Philippines, the monetary board of the central bank cut rates by 25 bps leaving the overnight borrowing rate at 5% and the overnight lending rate at 7%, according to the central bank's website.

The bank's new inflation forecast shows a 4% growth rate of the peso in 2008 and a 3.5% growth rate in 2009.

The peso's continued strength will hold off rising commodity and oil prices, the bank's statement said.

The peso was seen trading down by 0.05 at 40.3 against the dollar.

The Philippine government bonds due 2030 were unchanged at 132.5 bid.

In Indonesia, return on equity investment finished 2007 at 54% due to 6.3% economic growth, according to a report in the Jakarta Post.

Asia, excluding Japan, had an average return of 40.5%, compared to 14.4% in Europe.

The Indonesian sovereigns due 2018 added 0.125 to trade at 103.375. The bonds due 2038 were quoted at 105.75 bid.

Pakistan's issues continue to slowly improve as investors show more confidence in the country's stability.

The Pakistani sovereign bonds due 2017 were quoted at 85 bid.

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