Emerging markets bashed by developed world; volatility, spreads spike; Argentina's bonds weaken

By Aaron Hochman-Zimmerman

New York, Oct. 15 - Emerging markets were beaten down as investors stared dumfounded at another crushing slow-motion defeat for the Dow Jones Industrial Average.

"There's still lots of volatility, lots of downside," a market source said.

One trader looked ahead half-heartedly to London's EMTA (Emerging Markets Trading Association) ball on Friday.

"It's usually a good bash," but this year, the trader said he was expecting "a bit of a somber affair."

In trading on Wednesday, prices were difficult to pin down when they were available at all, sources said.

Still, the bellwether discount bonds due 2033 from Argentina were spotted lower by 2.25 points.

From the major markets, volatility saw a mammoth increase of 14.12 to 69.25, according to the VIX index. The index is a common measure of market volatility.

Spreads were knocked around as well. Emerging markets widened by 22 bps to a spread of 566 bps, according to JPMorgan's EMBI+ index.

On a return basis the index was down 3.45%.

The EMBI+ estimates the amount of extra yield investors will demand to keep assets in emerging market debt.

Emerging Europe sours

Emerging Europe continued to grind its gears through another difficult day of trading after poor retail sales figures from the United States further poisoned the waters.

"The economy is finished, over," a London-based trader said. "What can you say?"

"There's not a huge amount trading ... a little bit of action in CDS, which is all blowing wider," he said.

"Liquidity and turnover in my world is totally fading," he said, "It's getting harder to do anything."

The governments of the world have brought most of their force to bear and left little else to be done, he said.

"There's probably a little more that the MPC can do," he said about the Bank of England's Monetary Policy Committee, which has the power to lower the 4.5% interest rate. "They need to come down to maybe 3%."

Still, it's all rearranging "deck chairs on the Titanic," he said.

Meanwhile in Turkey, the finance ministry has been in talks with the International Monetary Fund to establish a stand-by loan agreement.

"Discussions with the fund are ongoing, but a deal is not yet done," said finance minister Mehmet Simsek, according to the Turkish Daily News.

A recent three-year deal made $10 billion available.

Simsek acknowledged the desire for a safety net but dismissed the idea that it is a necessity.

"I appreciate the markets' desire for an anchor to the crisis with such a deal, but in fact Turkey's banking and financial system are sound," Simsek said.

The Turkish sovereign bonds due 2030 were quoted at 128 bid, 129 offered.

Also in emerging Europe, Russia took part in negotiations with a delegation from Iceland on Tuesday.

Russia is considering a €4 billion loan to troubled Iceland, which would make it the first Russian loan to a NATO nation, according to the Itar-Tass News Agency.

"Iceland is known for strict budgetary discipline and high rating. We feel positive about this request," said finance minister Alexei Kudrin in the report.

Also, a separate delegation from Moscow met in Geneva with representatives of Georgia.

Russia still has about 8,000 troops in Abkhazia and South Ossetia but withdrew from buffer regions in Georgia-proper after talks with French president Nicolas Sarkozy.

"The international discussion that shall take place tomorrow is a beginning. This should not be seen as the end," said U.N. secretary-general Ban Ki-moon.

The United Nations, the European Union and the OSCE (Organization for Security and Cooperation in Europe) sanctioned the talks, but officials said tangible progress is unlikely in the early stages of the talks.

The Russian sovereigns due 2030 were slammed for 4.75 points to 89 bid, 90 offered.

Timoshenko allies arrested

Elsewhere in Ukraine, criminal proceedings were filed against members of the Yulia Timoshenko bloc.

The members allegedly pressured a Kiev court to block early elections through violence and intimidation, reports said.

"It has been verified that four Timoshenko bloc members stayed in the court chairman's office throughout Oct. 11 threatening to throw him out of the window, beating him on his hands and preventing him from using his computer," security council chief Valentyn Nalyvaichenko said, according to the RIA Novosti News Agency.

Timoshenko also attempted to stall elections by refusing to release $80 million for new elections requested by president Viktor Yushchenko.

Timoshenko was formerly allied with Yushchenko in the 2004 Orange Revolution but has recently sided with the pro-Russia opposition by making attempts to limit presidential power.

"It's chaos in Ukraine," the trader said.

The Ukrainian five-year CDS was seen at 1,500 bps bid, 1,750 bps offered.

LatAm slammed by externals

"The Dow [Jones Industrial Average] makes it rocky for everyone," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Everything is just pinned to what goes on in the United States," he said.

Still, it is very hard to determine the correct values with "bid-offer spreads are all over the place," he said.

Argentina is a good bellwether; "it doesn't have too bad of a spread," he said, saying the same for "some things on the long end of Brazil."

Meanwhile in Buenos Aires, teachers began a two-day walkout on Wednesday, according the Buenos Aires Herald.

Mayor Mauricio Macri told the teachers that the budget could not support a wage increase, but he was unable to deter the strike.

The 8.28% Argentine discount bonds due 2033 were lower by 2.25 points at 40.25 bid, 41 offered.

The 7 1/8% Brazilian bonds due 2037 slipped 1.5 points to 89.5 bid, 92 offered.

In Venezuela, the government is likely weeks away from signing a sizable defense deal with Russia, reported RIA Novosti.

Talks in September laid the groundwork for a defense deal, which may include state of the art air defense systems and aircraft, but the current deal before the defense ministry involves small arms and infantry vehicles.

"In addition to the small arms, light weapons and ammunition delivered earlier, a large shipment of BMP-3 infantry fighting vehicles is to be delivered," said Igor Sevastyanov, deputy general director of Rosoboronexport, in the report.

The 9¼% Venezuelan government bonds due 2027 fell 3.25 points to 60.25 bid, 62.5 offered.

Peru is a country that has somewhat steered its own ship lower.

A bribery scandal and the installation of a replacement cabinet as well as a terrorist attack by the rebel group Shining Path have severely hurt president Alan Garcia's popularity.

The 8¾% Peruvian bonds due 2033 fell 2 points to 96 bid.

Still, the country's levels are difficult to determine, "it depends on which instrument you look at," Alvarez said.

Asia searches for good news

Asia, which has recently been known to outperform the other sectors, was light on good news on Tuesday, a trader said.

"The only remotely positive thing you can say about today is that price action has been relatively constrained," he said.

Rather than "abject panic" during the previous week, Wednesday saw a more orderly decent for the sector.

"We snapped tighter on Monday and Tuesday in Asia and we've pretty much faded ever since in terms of CDS spreads," he said.

"Names like South Korea are close to 100 [bps] off the tights of Tuesday, Asia," he said.

On Wednesday, the South Korean five-year CDS widened by 25 bps to 320 bps bid, 340 bps offered.

At the very least, the worst fears are gone, the trader said.

"The risk of a total meltdown in the financial system ... you just haven't seen anything like that," this week, he said.

People are "looking to try and call a bottom," he said.

In the Philippines, remittances from foreign workers reached $1.3 billion in August, pushing the year-to-date total to $11 billion, or 17.2% higher than during the same period of 2007, according to a statement from the central bank.

Still, remittances in August fell by 10.4% compared to August 2007.

Remittances may face a continuing slowdown, the central bank said, but will be supported by a 26.4% increase in new hires, particularly in the Middle East.

Also, "Filipino workers overseas and their families have gained greater access to enhanced banking services provided by local banks and their foreign counterparts," the statement said.

The Philippine sovereigns due 2030 slipped 3 points to 106 bid, 109 offered.

In Indonesia, the government cut its forecasted budget deficit to 1% of GDP from 1.3% of GDP, according to the Jakarta Post.

The government did not rule out further cuts.

"There is still the option to lower it if the government can reduce spending," said Suharso Monoarfa, vice chair of a budget committee in the House of Representatives, in the report.

The government also expects a reduction in oil subsidies as demand fades from its peak in July.

The Indonesian government bonds due 2017 fell 3 points to 69 bid, 72 offered.

Pakistan's situation worsening

In Pakistan, the political situation was given a "very bleak" and "very bad" assessment by unnamed U.S. officials who worked to draft the new National Intelligence Estimate on the country.

The increasing presence of al-Qaida fighters and the lack of a government presence have left Pakistan with "no money, no energy, no government," the official said, according to the McClatchy Newspapers.

The Pakistani government bonds due 2017 were quoted near 35 bid, 40 offered.

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