Emerging market bonds walloped early; volatility at all-time high; slight bounce in late trading

By Aaron Hochman-Zimmerman

New York, Oct. 6 - Emerging markets along with developing markets around the world plummeted and largely came off the lows during a gut-wrenching session Monday.

Investors chewed through antacids as cash markets were dry and spreads widened despite more talk of bailout packages from banks around the world.

Argentina saw some of the worst the day had to offer as its bonds set record wides since its 2005 restructuring.

Latin America's pain was mildly balanced by Asia's relative success.

Still, "EM as a whole still feels kind of dicey," a trader said.

"There's more pain out there," he added.

Elsewhere, the shackled primary market will not be "getting out of this anytime soon," a syndicate official said, especially in the high-yield space.

Meanwhile, volatility soared as the VIX hit a record high. The index, which is a common measure of market volatility, climbed as high as 58.24 but ended up by 6.91 at 52.05.

Another equity massacre sent investors ducking for cover under Treasuries while emerging markets were ripped wider by 18 basis points to a spread of 458 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

Turkish farmers rail farm aid bill

In Turkey, farmers condemned a draft bill that would increase subsidies on certain crops by one new kuru per 1,000 square meters.

"The premium increase of one new kuru is almost making fun of farmers," said Aydin Kesen, chairman of the Izmir Mercantile Exchange, according to the Turkish Daily News.

The farmers hoped for at least two new kurus of subsidies per 1,000 square meters in 2009.

Also, two Turkish soldiers were declared missing and are believed to be held by Kurdistan Workers' Party rebels in the southeast region of the country.

Turkey was not able to confirm whether or not the captured soldiers are alive.

Clashes have intensified in recent days including air strikes and ground skirmishes.

After an attack on rebel positions on Friday, the Turkish military reported 15 men killed and 20 wounded in the fighting.

The Turkish bonds due 2030 were quoted at 139.5 bid, 140.5 offered.

The lira was also badly damaged and seen trading at 1.374 to the dollar.

LatAm shares pain, commodities down

Latin America shared the pain equally on Monday as almost none of the sector's credits could claim an outperformer label, a syndicate official said.

"Everything got smashed, got shattered," he said.

Still, as a unified sector there was a slight rebound at the end of trading, "people were just selling off way too fast," he said.

Oil, metals and soft commodities were down across the board, he said, pointing to oil for the Bovespa's 15% losses.

Light sweet crude was seen trading as low as $88 per barrel.

"Everything fell," he said about the commodities on which Latin American economies depend.

Brazil's regulators suspended trading for a time after heavy losses, but the index bounced back to finish lower by close to 10%.

The real was seen trading at 2.196 to the dollar.

The 11% Brazilian bonds due 2040 closed at 122 bid.

In Venezuela, former defense minister, retired general Raul Isaias Baduel, was barred from leaving the country over charges possibly relating to his fierce criticism of president Hugo Chavez, according to the New York Times.

Baduel is accused by the government of corruption allegedly related to a missing $14.5 million.

Still, Baduel has become a folk hero to those with anti-Chavez leanings.

A video of the former defense minister being shoved into a car by police the night of his arrest has been broadcast widely on pirate television networks, the report said.

The 9¼% Venezuelan sovereigns due 2027 were seen at 63.5 bid.

Asia 'could've been a lot worse'

Asian issues were rocked on Monday but still managed to outperform Latin America, a trader said.

"The turnaround midday today gave guys some hope," he said. "It could've been a lot worse."

"The tone still completely sucks ... cash markets are very illiquid," he said.

In the Philippines, the central bank left its key interest rates unchanged, according to a report following its meeting on Monday.

The overnight borrowing rate was held at 6%, while the overnight lending rate was held at 8%, according to the statement which followed.

In support of its decision, the monetary board cited its calls for single-digit inflation by the first quarter of next year.

Also, "food and energy prices are retreating from recent highs, and this could indicate lower headline inflation and more flexibility for monetary policy," the statement said.

"There are also early signs of improving inflation expectations with the easing of oil and rice prices," the statement added.

Still, the bank reaffirmed its commitment to take action in the proper situation.

The Philippine sovereign bonds due 2030 were quoted at 118 bid.

In Indonesia, president Susilo Bambang Yudhoyono reassured his country that 2008 would not bring a repeat of the 1997 financial crisis, according to the Jakarta Post.

Indonesia will not completely escape from the credit crisis, but his administration is working on programs to mitigate the fallout from the United States.

The solution is to turn inward, Yudhoyono said.

"Let us exploit our domestic economy. We must expand our domestic market," he said in the report.

In order to discourage imports, an incentive program will encourage retail and commercial consumers to purchase domestically produced goods.

The Indonesian government bonds due 2017 were spotted at 81 bid.

In Pakistan, credit continued to suffer as Standard & Poor's downgraded the country's paper to CCC+ from B.

The Pakistani bonds due 2017 were difficult to price, a trader said, but were generally unchanged in the 45 bid to 49 bid area.

Emerging Europe, Ukraine pounded

Investors woke up to a "very weak" market in emerging Europe, a London-based trader said.

"We've seen the market seizing up in terms of bond trading," he said, adding that there has been a rash of "real money redemptions."

In Russia, the negative sentiment was exacerbated by the stock market, which was pounded at the open on Monday.

The market fell fast enough for regulators to order a halt in trading.

Meanwhile in Georgia, Russian troops abandoned a checkpoint north of the strategic town of Gori, E.U. observers reported.

The withdrawal would make it the first in a series of pullbacks Russia agreed to with French president Nicolas Sarkozy.

Also, it was revealed that Switzerland is the European country that has agreed to represent Russian interests before the Georgian government.

Georgia agreed to deal with the Swiss Federal Department of Foreign Affairs as an intermediary.

Ties were cut between Russia and Georgia at the outset of the recent hostilities.

The Russian sovereign bonds due 2030 were seen at 99.5 bid, 100.5 offered.

The ruble was seen trading at 26.282 to the dollar.

Elsewhere in emerging Europe, "Ukraine continues to face the brunt of it," a trader said as protection became more expensive on Monday.

The worldwide credit crunch has piled risk aversion onto an already uneasy political situation as the major factions in government attempt to reform a coalition.

The Ukrainian five-year CDS widened to trade near 1,000 bps bid.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.