Emerging markets inch higher; Argentina pension plan passes House; recovery must outwait lag

By Aaron Hochman-Zimmerman

New York, Nov. 7 - Emerging markets ended the week with a subtle lift in prices, but a severe widening of bid-offer spreads.

The week began with a rally, which quickly faded and could not stave off a $473 million outflow from emerging market bond funds, according to EPFR Global.

The bid-offer spreads on Friday left the market feeling "a little more jittery," said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal, and the prospect for the coming sessions seems very similar.

"We're stuck to the economic data," he said, with no other "real big catalyst" to push the market in either direction.

"We'll just track equities," said a strategist.

"Until banks start lending to each other and businesses, the outlook is going to remain pretty grim," he said.

Of course, there is the "huge lag," he added.

It took more than 15 months for the credit crisis to affect the real economy, he said, and there is nothing that indicates a recovery will not face the same lag time.

JPMorgan's EMBI is figuring an 8% future default rate, he said, but "I don't see how it can be lower than 10%."

Meanwhile, as equities recovered from a two-day trouncing, volatility fell by 7.58 to end at 56.10, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets widened by 1 basis point to a spread of 613 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns was tighter by 3 bps with a spread of 679 bps.

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

LatAm 'a mixed bag'

Latin America was "a mixed bag," on Friday, IDEAglobal's Alvarez said.

Bid-offer spreads were wider again, which left issues difficult to price, he said.

Still, many of the highly watched names came out slightly ahead.

In Argentina, the lower house of the legislature approved the pension nationalization plan which is expected to put $30 billion in government coffers.

"We'll wait and see what the Senate does on that," he said, but so far the action has gone "pretty much as expected," Alvarez said.

Many investors believe the move is necessary to keep the government solvent, but critics accuse the government of stealing from pensioners.

The government needs the money to "backstop itself," he said, but from an investor's perspective "How much lower can it go?" he asked.

The loss of credibility is relative to the amount of credibility they currently have.

The 8.28% Argentine discount bonds due 2033 added 0.5 point to 27 bid, 29.75 offered.

Looking at Venezuela's prospects, oil was lower but it "still hasn't crossed that $60 barrier," Alvarez said.

Light sweet crude was seen trading slightly lower than $60 per barrel, but closed closer to $61 per barrel.

The 9¼% Venezuelan bonds due 2027 were better by 1 point to 61.5 bid, 62.25 offered.

Also in Latin America, Brazil's 7 1/8% bonds due 2037 were improved by 1 point to 93.75 bid, 95 offered.

Asia gains, bid-offers wider

Asia improved with the help of equity leadership on Friday.

Still, the gains were limited by illiquidity, light flows and shockingly wide bid-offer spreads.

In the Philippines, the central bank's monetary board allowed the reduction of cash reserves banks are required to hold and also released PHP 20 billion pesos into a rediscounting facility for the banking system, the central bank said in a press release.

"Going forward, the [central bank] will continue to monitor financial and monetary developments, particularly those in the credit market, and act as warranted to shield the financial system from the adverse effects of the global financial crisis," the bank's statement said.

The Philippines has held on much better than many expected, a strategist said about the nation, whose export-oriented economy is so "keyed into international trade."

"The Philippines should not be trading 20 bps tighter than Malaysia (A3/A-/A-)," he said, "which is a single-A credit."

"It's way too expensive," he added.

The Philippines sovereign bonds due 2030 added 1 point to 105 bid, 112 offered.

Also in Asia, Indonesia's bonds due 2017 were quoted at 74 bid, 80 offered.

Korea cuts rates 25 bps

South Korea's central bank cut its key lending rate 25 bps to 4%, according to a statement from the bank.

The bank cited the slowing pace of export growth which has dropped off "owing to the weakening of global economic growth," the statement said.

"Domestic demand such as private consumption remains sluggish," the statement continued.

The bank pledged to consider inflation going into the future, but noted that despite the won's fall against the dollar prices were lower due to the easing of commodity costs as well as the general global slowdown.

The won was seen trading at 1,317.17 to the dollar.

Emerging Europe lower, Turkey slammed

Emerging Europe was lower on Friday, but over recent sessions has been an agile swimmer in a choppy sea.

"I'm half-amazed that Turkey is trading as tight as it is," a strategist said, considering all of its political and currency trouble.

Still on Friday, the Turkish bonds due 2030 were hit for 6 points to 125 bid, 128 offered.

In Russia, presidential aide Arkady Dvorkovich dismissed the idea of a devaluation of the ruble.

"A slight fall in the ruble exchange rate is possible. No sharp ruble devaluation is expected," he said, according to the Itar-Tass News Agency.

Additionally, the government does not expect any major changes concerning the value of the currency in 2009, Dvorkovich added.

The ruble was seen trading at 27.03 to the dollar.

The Russian government bonds due 2030 dipped 1.125 points to 90.375 bid, 91.875 offered.

Meanwhile in Georgia, thousands of protestors gathered in Tbilisi to call for new elections to replace president Mikhail Saakashvili.

The demonstrations were the first of their kind since the Russian invasion.

"We are starting a new wave of civil confrontation, and we will not give up until new elections are called," opposition leader Kakha Kukava said, according to the BBC.

Recently Saakashvili replaced the army's chief of staff, Zaza Gogava, for failings during the Russian conflict.

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