Emerging markets slide; bid-offer spreads widen; South Korea to announce bank aid; Argentina lower

By Aaron Hochman-Zimmerman

New York, Oct. 17 - Emerging markets initially followed a positive Dow Jones Industrial Average for as long as the index remained positive on Friday.

Issues ended slightly lower as investors were wary to turn their backs on a successful market that might turn sour without notice.

"You never can tell," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, about the fickle market.

"It's been all over," he said.

In trading, Argentina's discount bonds due 2033 eased lower, but at 38.25 bid "it's really near default levels," Alvarez said.

Some good news was expected over the weekend from South Korea. Investors waited for a rescue package from the government for its troubled banking industry.

Despite the isolated positive news, volatility continued to haunt investors.

The VIX index fell midday, but ended higher by 2.72 at 70.33. The index is a common measure of market volatility.

"It's very, very choppy," a trader said.

"There is a lot of risk reduction in almost every market," he said.

Emerging market bond funds posted outflows for the 10th straight week, losing a total of $8.7 billion, according to EPFR Global.

As a sector, emerging markets was wider by 6 basis points at a spread of 628 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

LatAm inches wider

In Latin America "spreads are a tad wider, maybe 5 bps," said IDEAglobal's Alvarez, although the wide bid-offer spreads make it difficult to tell, he added.

"You have to go price by price," he said.

"It's an illiquid market ... it's tough to get things done," he said.

For example, even an issue such as Brazil's 8¼% bonds due 2034 traded with a 3-point spread at 94 bid, 97 offered.

In Argentina, bonds slipped as the government moved ahead with plans to swap between $4.5 billion and $7.5 billion for guaranteed loans.

The new loans would be subject to longer maturities and the haircuts inherent in the market turmoil.

"Any sort of swap you're going to have to make it incredibly attractive for people to bite," Alvarez said.

"You're talking about new money," he said, and "people are not that enthusiastic about putting their hands in their pockets."

The 8.28% Argentine discount bonds due 2033 shed 0.25 point to 38.25 bid, 38.5 offered.

Oil producers Venezuela and Ecuador were pounded again as oil was seen trading below $70 per barrel.

"They're the ones that will have the most problems," Alvarez said, because their economies are more one dimensional.

The diverse economies in Mexico and Colombia will be affected, but "to much smaller degrees," he said.

The 8% Ecuadorian bonds due 2030 fell 1 point to 53 bid, 55 offered.

The 9¼% Venezuelan sovereigns due 2027 added 0.25 point to 58.25 bid, 59 offered.

Blue on blue battle in Brazil

In Brazil, striking police detectives fought with riot officers in the streets of Sao Paulo on Friday.

About 20 injuries were reported after the riot force held its ground with tear gas and rubber bullets as the detectives attempted to enter the state office building of governor Jose Serra.

The strikers have been on picket lines seeking a 15% pay raise for one month.

Still, Serra told reporters that many of the demonstrators were political operatives, not actual police officers.

The 11% Brazilian sovereigns due 2040 were better by 0.2 point to 112.3 bid, 112.85 offered.

Asia just 'all right'

Asia credits were "actually all right," on Friday, a trader said.

"We're a little bit tighter from how we started the day" and "cash prices have actually held all right," he said.

The big news is coming over the weekend from South Korea, he said on Friday.

The market is expecting an announcement about the government package to restore confidence in the country's banking system, he said.

It is likely to include provisions for greater availability of dollar funding and some combination of deposit or debt guarantees.

"That should restore some confidence," he said.

The South Korean five-year CDS was wider by 50 bps at 375 bps bid, 405 bps offered.

In Indonesia, the World Bank announced it will hold $2 billion in reserve as a standby loan to the country, the Jakarta Post reported.

The government had requested $5 billion.

The loan will only be activated if growth slows below 5.8% through the first quarter of 2009, said Paskah Suzetta, state minister of the National Development Planning Agency.

"The $2 billion will in fact be sufficient to strengthen the domestic market during this economic crisis," he said in the report.

"It will be used, among other things, to finance infrastructural development," he added.

The Indonesian government bonds due 2018 were down 1.5 points to 64 bid, 68 offered.

In China, waivers that allowed greater press freedoms during the Olympics were set to expire on Friday.

Chinese authorities gave no indication that they would take any action other than to resume their previous practices, according to the BBC.

Even while they were in effect, the temporary rules granted only limited access to reporters who were still subjected to government harassment campaigns, the report said.

"We will, as always, welcome foreign journalists to China and continue to facilitate your work and stay," said foreign ministry spokesman Qin Gang, the BBC reported.

Also in Asia, Pakistan's bonds due 2017 remained at bargain basement levels and were seen at 35 bid, 40 offered.

Philippines posts FDI outflows

Elsewhere in the Philippines, the central bank reported outflows of $312 million from foreign portfolios during September, according to a statement.

The steep loss in September follows losses of $20 million and $188 million in July and August, respectively, the bank said.

"This was due primarily to the meltdown in the U.S. financial markets, the effects of which have spilled over to other countries, and subsequent fears that a recession in major economies is imminent," bank governor Amando Tetangco said in the statement.

Total foreign investment currently registers $517 million, with 67% in equities, in government securities and less than 1% in peso bank deposits.

The Philippine sovereign bonds due 2030 sank 3.5 point to 104 bid, 106 offered.

Emerging Europe slides

Emerging Europe declined on another volatile session on Friday.

Politics weighed on issues as spreads were dragged wider.

In Ukraine, bonds were shaken by a Fitch Ratings downgrade to B+ from BB- on Friday.

Fitch cited a weakening currency as well as a still rocky political future.

Meanwhile, president Viktor Yushchenko was scheduled to meet with representatives of the International Monetary Fund on Friday.

The IMF may provide up to $14 billion in loans to support the country's banking system, but prime minister Yulia Timoshenko insists that politics may hamstring the loans.

Timoshenko claimed on Thursday she is ready to work with Yushchenko in order to save the coalition, but still called for early elections, now scheduled for Dec. 7, to be postponed.

Timoshenko believes the loans are contingent on a stable government, which may be scattered by a return to the polls.

The hryvnia was seen trading at 5.235 to the dollar.

In Russia, business groups called for trade between Russia and China to use local currencies rather than the dollar, the Itar-Tass News Agency reported.

"We have to switch to settlements in the national currency, as payments in dollars often unreasonably delay remittances," board chairman of the Russian-Chinese trade and economic cooperation center, Sergei Sanakoyev, said in the report.

The matter will be discussed at an upcoming forum, but Sanakoyev believes the two emerging economies are "complementary" and can help each other survive the global financial slowdown, he said.

Both prime ministers Vladimir Putin of Russia and Wen Jiabao of China are expected to attend the forum in Moscow on Oct. 28.

Also in Europe, Turkey edged out Iceland for one of two non-permanent European slots on the U.N. Security Council.

Iceland's financial crisis gave Turkey the edge as it took 151 of 192 votes for the position.

Turkey joined Austria, Japan, Mexico and Uganda as the new two-year term holders in the rotating 10-nation non-permanent portion of the council.

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