Emerging markets continue correction; sign of more to come; Hungary distributes IMF cash, tightens

By Aaron Hochman-Zimmerman

New York, Nov. 6 - Emerging markets continued to tumble on Thursday as the brief rally gave way to the underlying fundamentals most investors still feared.

"It's a sign of more to come," a trader said.

Due to "the pain which started in the U.S., the rest of the world is catching a cold right now," he said.

A report on the health of the world economy agreed and added to the downtrodden mood in the market.

"World growth is projected to slow from 5% in 2007 to 3¾% in 2008 and to just over 2% in 2009, with the downturn led by advanced economies," the International Monetary Fund said in a statement.

Now that the market has turned again "the very brave on Monday are now questioning whether they might have gotten in a little too early," the trader said.

In trading, "nothing really stood out as especially weak or especially strong today," he said.

Still, Hungary was able to tighten as it released its plan to disperse the IMF loan funds to its banks.

Elsewhere, as equities around the world tanked, volatility numbers spiked by 9.12 to end at 63.68, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets widened by 5 basis points to a spread of 604 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand in order to keep assets in emerging market debt.

'Another bad day' in Asia

Asian credit suffered on Thursday after a strong round of buying at the beginning of the week.

The market had "another bad day," but the reason was more visceral than obvious, a trader said.

"It's really hard to put a finger on it," he said.

"There's still a lot of pain out there, a lot of leverage being unwound," he said.

The results of the election in the United States was "historical and monumental," he said, as well as "a big plus" looking into the future; however, in the near-term, "there are still a lot of problems out there."

In the Philippines, the GDP forecast may be increased to 4.6% to 5.5%, from a 4.1% to 5.1% forecast made in September, according to the Manila Times.

The Development and Budget Coordinating Committee proposed the change as a 20% increase in government spending as well as higher consumption, based on lower inflation, is expected.

Still, the higher estimate is still lower than the 6.1% to 7.1% range used to calculate the 2009 budget, the report said.

The Philippine government bonds due 2030 were spotted at 104 bid.

In Indonesia, economic expansion hit 6.4% in the third quarter, but the central bank expects the pace to slow into the end of the year, according to the Jakarta Post.

"With two months left to run in the fourth quarter, we estimate the impact of the global slowdown will hit Indonesia's economy, resulting at best in growth of around 5.9%," Bank Indonesia deputy governor Hartadi Sarwono said.

If the estimate of 5.9% is correct, "full-year growth [will be] between 6.1% and 6.2%," he said in the report.

The figure would be only a slight drop from the country's 6.3% growth in 2007.

The Indonesian sovereigns due 2018 were seen at 73.5 bid.

Also in Asia, Pakistan's bonds due 2017 were quoted at 42.5 bid.

Emerging Europe gives up rally

Emerging European credits saw "a little moment of euphoria" on the news of the rate cuts from the European Central Bank and the Bank of England, but "it faded quickly," a trader said.

Sentiment remains strong even as many issues drifted slightly wider on a slow day of trading.

"Dealers have gotten out of their long positions now," the trader said.

The rally allowed many investors to escape from risky positions and now they "seem to be selectively buying CDS around these levels," he said.

In Hungary, the nation's banks were offered a $3 billion aid package from the $25 billion loan from the International Monetary Fund.

"We have developed, in consultation with IMF staff, a comprehensive package of support measures available to all qualified domestic banks, to buttress their credibility and confirm our commitment to preserving their key role in the Hungarian economy," the Hungarian central bank wrote to Dominique Strauss-Kahn, managing director of the International Monetary Fund.

"Total funding of HUF 600 billion [$3 billion] will be divided evenly between the capital base enhancement fund and the refinancing guarantee fund," the letter said.

The Hungarian five-year CDS tightened 5 bps to 325 bps bid, 350 bps offered.

Elsewhere, neighboring "Romania was fairly weak today," he said.

The Romanian five-year CDS was seen at 450 bps bid, 485 bps offered.

Ukraine wound tighter after the announcement late Wednesday that the IMF approved a $16.5 billion loan to the struggling economy.

The first tranche of the loan, $4.5 billion, is expected to be transferred to the Ukraine in three to five days, according to president Viktor Yushchenko's official web site.

Also, parliament speaker Arseny Yatsenyuk suggested the country only sign long-term energy contracts with Russia in order to avoid annual renegotiations, the Itar-Tass News Agency reported.

Ukraine was an outperformer of the session, but illiquidity made its levels difficult to spot, the trader said.

The Russian sovereign bonds due 2030 continued their slide and were quoted at 91.5 bid, 93.375 offered.

Turkey's government bonds due 2030 generally held their value at 131 bid, 135 offered.

LatAm knocked lower

Spreads were wider on Thursday as investors reacted to a rash of strong buying earlier in the week.

In Argentina, officials in president Cristina Kirchner's administration were confident of victory in both houses of the legislature for the pension fund nationalization, the Buenos Aires Herald reported.

The bill looked even more likely to pass after the administration agreed to add provisions from the opposition into the text of the bill, the report said.

"I think that's going to happen," a strategist said.

The assets from the pension funds will keep the government liquid for the time being but will saddle it with a big "loss of credibility," the strategist said.

The peso was seen trading at 3.321 to the dollar.

Also in Peru, protestors clashed with police over a new law that will divert revenue from mining taxes to the Moquengua region and away from the Tacna region.

Prime minister Yehude Simon said he refuses to negotiate as long as there is violence in the streets, according to the BBC.

© 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.