Emerging markets stung again; sectors see sporadic gains; mild spread tightening on Treasuries

By Aaron Hochman-Zimmerman

New York, Oct. 7 - Emerging markets were whipped again, but some credits managed to escape the full wrath of the credit crunch on Tuesday.

Russia and Brazil managed to hold themselves up while high-beta credits Ukraine and Argentina were subject to the brunt of the day's risk aversion.

"I thought we saw the capitulation trade yesterday, but obviously not," a strategist said.

Then the market might "benefit from some positive reaction today," he added, but the deflated market was not able to bounce back.

The market is pressuring the central banks to give it anything it wants, he said, and this market will be what the world must deal with until the central banks give in.

At the suggestion of a rumored rate cut from the Federal Reserve, the strategist said: "I wouldn't be half surprised."

"I just don't see any reason for a sustained upside," he said. "You just watch everything tank."

In the broader market, volatility was up again to unprecedented levels. The VIX index spiked late to add 1.63 to close at 53.68. The index is a frequently used gauge of market volatility.

Treasury action served to tighten up emerging markets spreads on Tuesday. Spreads were tighter by 2 basis points at 499 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was unchanged at a spread of 534 bps.

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

Emerging Europe damaged again

Slight outperformers were created in emerging Europe by a series of liquidity injections into the market, particularly in Russia, where $36 billion was dumped on the market courtesy of the central bank.

The government announced it will offer 950 billion rubles in loans to banks in order to overcome the liquidity crunch.

The major borrowers under the plan were OAO Sberbank, which was given 500 billion rubles, and VTB Bank, which was given 200 billion rubles. Other struggling banks collectively received about 250 billion rubles.

Some of the Russian banks performed relatively well after the injection. "It helped a few of them," a strategist said.

Still, year to date the Micex is down 60%.

Also, the Russian Economic Development Ministry announced that inflation will likely surpass its 12% target in 2008, according to the Itar-Tass News Agency.

The ministry could not offer a specific prediction beyond 12%.

The Russian government bonds due 2030 added 0.15 point to 99.65 bid, 100.25 offered.

Elsewhere, Ukraine's paper continued to be pounded by drying world liquidity and a rocky domestic political picture.

Prime minister Yulia Timoshenko lashed out against president Viktor Yushchenko's calls for early elections aimed at quickly repairing the shattered ruling coalition.

"I am reluctant to even discuss the theme or early polls. It would be an absurdity and a crime against the nation," she told reporters, according to Itar-Tass.

"I am struggling for a coalition in parliament. The decision depends not on the legislators, but on one person, the president," she said. "If the president regains common sense, a democratic coalition will emerge in half an hour."

Timoshenko accused her former ally, Yushchenko, of making an illicit deal with businessman Rinat Akhmetov, who favors early elections.

The Ukrainian bonds due 2016 were quoted at 62 bid, 63 offered.

In Turkey, the recent casualties suffered by the army in battles with the Kurdistan Workers' Party (PKK) will shape domestic and foreign in the coming months.

Over the weekend Turkey reported 15 of its soldiers were killed and 20 wounded in fighting with the PKK, according to the Turkish Daily News.

Also, an ongoing closure case against the pro-Kurdish Democratic Society Party (DTP), similar to the recent case against the ruling AK Party, may be influenced by the recent deaths.

"What the PKK is trying to do is create a climate of terror in Turkey until the early elections, which of course is to the advantage of the DTP," said political analyst Rusen Cakir, according to the report.

LatAm down with few bright spots

Latin America was generally worked over on Tuesday as equities tumbled again and investors found fewer reasons to hold risk.

In Argentina, cabinet chief Sergio Massa announced that the country's foremost economic leaders were scheduled to meet to discuss the building global economic crisis, the Buenos Aires Herald reported.

The government also insisted that its fundamentals and budget surplus will guide the country through the hardship.

The 8.28% Argentine government bonds due 2033 were seen at 44.5 bid, 45.5 offered.

"That's recovery value," a strategist said.

However, "Brazil has held up relatively well," he said.

The 11% Brazilian bonds due 2040 slipped 0.85 point to 121.15 bid, 122.45 offered.

The real was also seen trading at 2.310 to the dollar.

Peru energy minister resigns

In Peru, energy and mines minister Juan Valdivia resigned amid allegations that he accepted bribes in exchange for oil production rights.

Valdivia was allegedly caught on tape discussing payments in exchange for a favorable contract with a representative of Discover Petroleum of Norway.

The company has denied any wrongdoing.

"We have never been aware of nor been responsible for any forms of such payments that they are talking about, and we strongly deny any such allegations," Discover said in a statement.

"The best way to deal with these outrages and these thieving rats is to respond immediately and make sure we cleanse our government of any corruption," said president Alan Garcia, according to the BBC.

Still, "Peru is performing relatively well," a strategist said, still "everyone is cutting their exposure."

Asia tracks inflation

Inflation concerns, which are closely tied to commodities, were lessened in the Philippines, while in Indonesia inflation remained on its shallow but upward trajectory.

The Philippines' inflation rate decelerated to 11.9% after 10 straight months of increases, the central bank said in a statement.

Inflation hit 12.5% during August, which leaves year-to-date average inflation at 9.2%.

The bank pointed to falling commodity prices for the easing rate.

"Slower year on year increases in the prices of rice, corn, and fruits and vegetables brought down food inflation, while the four rounds of rollbacks in the prices of petroleum products in September led to lower year on year inflation in gasoline products, diesel and kerosene," the statement said.

Bank governor Amando Tetangco noted that the new figures place the actual numbers within expectations and on a trajectory for the bank's anticipated recovery.

The peso was seen trading at 47.296 to the dollar.

In Indonesia, inflation hit 12.1%, up from the August rate of 11.9%, as the government's statistics agency blamed high demand during the fasting month of Ramadan leading up to the celebration of Idul Fitri.

The new report leaves year-to-date inflation at 10.5%, but the government expects the rate to reach 11.4% by the end of 2008, according to the Jakarta Post.

The rupiah was seen trading at 13,060.72 to the dollar.

"Pakistan has been totally hammered," the strategist said.

The Pakistani five-year CDS traded near 1,800 bps bid.

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