Emerging markets creamed; markets liquidated; Argentina, Venezuela weaken; politicians hold reins

By Aaron Hochman-Zimmerman

New York, Oct. 2 - Emerging markets were clobbered again on Thursday while investors ran from risk ahead of a Friday vote in the U.S. House of Representatives on the possible $700 billion assistance package.

All day the market "has had a liquidating feel," a trader said. "Any sort of funded asset is incredibly unpopular."

The sour market, which has made investors wince since the first rejection of the bailout, was "in some ways, always in the cards," a trader said.

"The market has shown that there can be no wobbling" on the part of the politicians in Washington, D.C., he said.

Now the market is in such a condition that passing the bailout is a "damned if you do and very damned if you don't" situation, he said.

After the bill's passage through the [U.S.] Senate was not enough to hearten the market, the bill has a better chance to pass as the House of Representatives goes to vote on Friday, he said.

The House will be more likely to approve with the market "swimming in a sea of red" on Thursday, he said.

During Thursday's session, Latin America's high-betas were hit especially hard as Argentina and Venezuela's benchmarks gave up 3.75 points and 2.5 points, respectively.

Meanwhile, volatility soared above 40.00 as equities sent the VIX index higher by 5.45 to end at 45.26. The index is a common measure of market volatility.

In the major markets, the flight to quality rallied Treasuries as emerging markets widened another 11 basis points to 430 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

Emerging Europe pushed lower, wider

Emerging Europe "felt fine for the first part of our day," said a London-based trader.

"It was certainly reasonably stable yesterday ahead of the Senate vote," he said on Thursday, as the positive vote in the U.S. Senate was not enough to sustain higher levels throughout the session.

Overall, even the prospect of a $700 billion bailout has not been enough to wipe away the gloominess in the market.

"There hasn't been much trading for weeks or months," he said. "All spreads [are] blowing out; cash bonds are sinking."

In Russia, the lower house of parliament will review two bills designed to aid the Russian economy.

One bill will allow the Bank for Development and Foreign Economic Affairs to offer loans in foreign currencies in order for recovering and servicing foreign debts.

The other bill will allow greater latitude to the central bank to offer six-month loans to certain Russian credit organizations.

Meanwhile, president Dmitry Medvedev met with German chancellor Angela Merkel to discuss the future of finance and trade in Europe.

The two leaders discussed the availability of Russian gas to Europe and the availability of the Russian market to European technology.

The meeting was intended to strengthen ties between the two countries, but Merkel reminded Medvedev that Georgia's sovereignty is "non-negotiable," she said.

Medvedev also insisted that the world needed a "more just" economic system.

The Russian government bonds due 2030 were lower by 0.75 point to 101.825 bid, 102.125 offered.

Also in emerging Europe, Turkey's sovereign bonds due 2030 also fell 0.75 point to 142.5 bid, 143 offered.

Ukraine wider amid gas talks

Meanwhile in Ukraine, prime minister Yulia Timoshenko met with Russian prime minister Vladimir Putin to discuss the energy trade.

"First and foremost I suggest addressing energy issues, as the winter draws near. We've got to close the subject, because energy supplies to Ukraine imply a no easy dialogue with the Central Asian partners," Putin said, according to the Itar-Tass News agency.

"Russia and Ukraine have all reasons to negotiate free market prices of fuels and energy and the gradual transition to them," Timoshenko said in the report.

Ukraine's spreads have been stretched painfully wide, a trader said. "Ukraine is getting killed."

As the country moved closer to the European Union and NATO, "they agreed to pay full price for gas," he said.

"Nobody wants to be part of their gang anymore," he said about many of the former Soviet republics, which have moved away from Russia.

Unfortunately for Ukraine, westernizing has the side-effect of paying market prices, he said, noting "all of them used to be heavily subsidized" as part of the former Soviet states.

The Ukrainian five-year CDS traded wider by 40 bps at 770 bps bid, 880 bps offered.

"It's close to 100 bps [wider] in a couple of days," the trader said.

Asia smashed ahead of Friday vote

"It's very messy indeed," a trader said, "appalling today."

Asian cash trading was nearly frozen and spreads were pulled wider as investors waited for the U.S. House of Representatives to vote on the bailout on Friday.

Whether it was technicals or hedges that weighed on spreads, "those trends are getting exacerbated," the trader said. "Spreads have widened very sharply."

In the Philippines, the central bank assured the public that the country is in no immediate danger of insolvency.

The dollar reserves are down to $36.7 billion at the end of August from a record high of $36.9 billion at the end of July, the Manila Times reported.

"We have no solvency issue. BSP has had its regular facility that provides liquidity loans to various financial institutions on market terms and collateral basis," said central bank deputy governor Nestor Espenilla.

"These windows are ready when necessity arises," he added.

The Philippine government bonds due 2030 were quoted at 121.75 bid, 122.75 offered.

In Indonesia, Malaysia's Malayan Banking Bhd. completed the acquisition of a 55.6% stake of Bank Internasional Indonesia for $1.24 billion.

Singapore's Temasek Holdings and South Korea's Kookmin Bank were also in the running for BII.

"It has been an intensive process to bring this transaction to a close, but we are happy that we have all now come to agreement," said Maybank president and chief executive officer Abdul Wahid Omar.

The Indonesian sovereigns due 2017 were seen at 85 bid, 88 offered.

Elsewhere, Pakistan's bonds continued to burrow lower to 40 bid, 48 offered.

Also in India, the United States ended its nuclear trade ban with a vote that will allow U.S. companies to sell nuclear technology to New Delhi.

Prime minister Manmohan Singh said it will allow India to overcome "the constraints of technology denial of 34 years," the BBC reported.

India is not a signatory of the Non-Proliferation Treaty.

LatAm drowns in volatile sea

Latin America sat through a difficult day of severe widening of credit spreads as investors could only speculate or hope about the fate of the TARP.

The toxicity from the United States weighed heaviest on Argentina, but another round of farmers' strikes set to begin on Friday helped sink the 8.28% Argentine discount bonds by 3.75 points to 50 bid, 50.5 offered.

Fellow high-beta credit Venezuela fell 2.5 points to 71.75 bid, 72.25 offered.

Brazil's 7 1/8% sovereign bonds due 2037 were spotted at 101.25 bid, 101.75 offered.

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