Emerging markets dump risk; Argentina at default levels; Venezuela down; volatility, spreads worsen

By Aaron Hochman-Zimmerman

New York, Oct. 22 - Emerging markets investors tried to sell as much as others were willing to buy on Wednesday.

Uncertainty within emerging markets and losses elsewhere had portfolios pitching risk overboard at a frenzied pace.

"There's panic in cash and panic in the CDS," a trader said.

Argentina was seen as one of the category's worst.

The nationalization of 10 pension funds amounted to a de facto default in the eyes of some in the market.

The country's bonds were already trading at what were essentially default levels, but the benchmark discount bonds due 2033 fell farther to 24.25 bid, 25 offered.

Also in Latin America, oil's $5-per-barrel drop helped present Venezuela with the biggest loss of the day among the major issues as its bonds due 2027 fell 7.75 points.

Equities were pounded by earnings and the simple fear that things might get worse.

Stocks' big losses spiked volatility by 16.54 to close at 69.65, according to the VIX index. The index is a commonly used yardstick of market volatility.

Argentina's de facto default

"It's a very difficult market," a strategist said about Latin America.

The sector off-loaded risk as fast as possible while Argentina continued to lead the retreat past default levels.

Whether or not the country actually defaults "doesn't matter," the strategist said.

"We're trading through default," he said.

The government may claim that the nationalization of 10 private pension funds and their $28.7 billion in assets is for the benefit of the pensioners, he said, but the move was intended to shore up the balance sheet.

Critics accused president Cristina Kirchner of "robbery" and for taking over the funds in order to use them as a "political war chest," according to the Buenos Aires Herald.

By taking the funds "they have in essence said: 'We are in default ... We need the money,'" the strategist said."

After the government placed the funds under the care of the social security agency ANSeS, the 8.28% Argentine discount bonds due 2033 sank by 6 points to 24.25 bid, 25 offered.

Elsewhere in Latin America, Venezuela's 9¼% sovereigns due 2027 dropped 7.75 points to 46 bid, 48 offered as oil was seen trading near $66 per barrel.

Also, Brazil's 11% bonds due 2040 were spotted trading at par.

Asia knocked lower

"It's real capitulation," a trader said about Asia's session.

Issues are generally down 10 points to 12 points on the long end and 5 points to 7 points on the short end, he said.

CDS spreads are "anything from 50 [bps] to 200 bps wider," he said.

South Korea, which had recently traded its five-year CDS at 440 bps bid, traded late in the day at 560 bps bid.

"These are just totally extreme moves," the trader said, but most of the damage has come "in the high-yield space."

"Tons of bonds are now trading in the 20s," he said, including issues from South Korea's Hynix Semiconductor and Indonesia's Blue Ocean Resources.

In the Philippines, the Bureau of Treasury turned down bids for its planned PHP 6 billion auction of 10-year Treasury notes on Tuesday, according to a press release.

Rates would have hit 9%, compared to the current secondary market rate of 8.35%.

"Investors are still cautious," said national treasurer Roberto Tan, according to the Manila Times.

Although, "there has been some positive news from the external environment," he said.

Also, PHP 5.2 billion of government debt matures this week, Tan said.

The Philippine government bonds due 2030 were seen at 85 bid, 88 offered.

In Indonesia, the Energy and Mineral Resources Ministry expects two new geothermal plants to come on line in 2009 to help ease the country's energy crisis, the Jakarta Post reported.

"Important equipment, such as turbines, have arrived at the sites, so we are optimistic the plants can begin operating next year," said the ministry's director of geothermal utilization, Sugiharto Harsoprayitno.

Indonesia controls the world's largest reserve of geothermal energy, which is capable of producing 27,000 megawatts of power, the report said.

Also Pakistan, which has been eyed for default, was spotted near 35 bid, 40 offered.

Emerging Europe runs from risk

Emerging Europe sold off where it could find investors still buying on Wednesday.

Spreads were kicked wider by growing despair over the world's economic situation.

In Russia, the country's bonds were slammed after the government said that there are no plans to water down the ruble.

"No devaluation is planned," said deputy finance minister Sergei Shatalov, according to the Itar-Tass News Agency.

In Georgia, 70 western powers and non-governmental organizations have offered $4.55 billion in loans to rebuild after the Russian invasion.

The amount far exceeded the $3 billion expected, prompting commission representative Benito Ferrero-Walder to say: "I think it is a day of joy."

Russia, which still maintains 7,000 troops in South Ossetia and Abkhazia, was not invited to the summit hosted by the European Commission and the World Bank.

The goal for the aid money is help settle refugees, rather than bolster the presidency of Mikhail Saakashvili, who some accuse of provoking the Russian attack.

Also, Russia said it is in no hurry to discuss the presence of the Black Sea fleet in Ukraine's Crimean port of Sevastopol.

Currently, Ukrainian president Viktor Yushchenko has no plans to renew the lease for use of the port past its expiration in 2017.

"At some point we will be ready to ask the Ukrainian side to discuss terms for the further presence, but, needless to say, these issues could be discussed in substance at a later stage, closer to 2017," Russian foreign minister Sergei Lavrov said, according to the RIA Novosti News Agency.

The Russian sovereigns due 2030 gave up 4.5 points to 81.5 bid, 82 offered.

3% rate hike in Hungary

In Hungary, the central bank raised interest rates 3% to 11.5% in order to support the tumbling forint.

The currency bounced after the hike but still remained at depressed levels.

Hungary remains on the edge of an economic disaster, and like many countries, Hungary has been in discussions with the International Monetary Fund to secure a loan to support the economy.

The forint was seen trading better at 219.361 against the dollar.

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