Emerging markets slide; Russia thrown wider; LatAm falls evenly; Venezuela sinks on oil weakness

By Aaron Hochman-Zimmerman

New York, Nov. 12 - Emerging markets spent Wednesday on the ropes.

Investors in the United States were bloodied as the global crisis welcomed them back from the Veterans Day bond market closure.

"It's getting scarier and scarier," a trader said looking around to all sorts of equities, derivatives, indices and commodities.

The trader admitted "EM as a whole did pretty well," but "I don't know if this is the calm before the storm or [if emerging markets] will be looked upon as some kind of safety haven, although I doubt it."

"I'm surprised at how well things are holding," he said, although at the end of the fiscal year for many banks flows are light and "I don't think there's enough liquidity to know."

Even if the category is in relatively better shape, "the risk aversion is clear," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"The Treasury curve is much tighter and that has not helped LatAm or EM in general," he said.

In trading on Wednesday emerging Europe was the biggest culprit spreading the risk aversion.

Russia was badly damaged as its five-year CDS spread was stretched 170 basis points wider.

Elsewhere, the equity dump spiked volatility by 5.02 to end at 66.46, according to the VIX index. The index is a common measure of market volatility.

Sinking equities sent investors running for Treasuries which widened emerging markets by 44 bps to a spread of 636 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept in order to hold assets in emerging market debt.

LatAm settles lower

Latin America was cut evenly on Wednesday as the bond market reopened in the United States after the Veterans Day holiday.

"There was no division between the high-beta and low-beta today," he said.

"There is the growing sentiment that you have a much more challenging environment on your hands," said IDEAglobal's Alvarez.

A greater global risk aversion "is trickling down," he said, as illiquidity broadened bid-offer spreads.

In recent sessions, risk returned and those who continued "looking to trade the short-term upside were pressed," he said.

Still, Venezuela took the brunt as "oil was through $60," Alvarez said.

Light sweet crude traded below the psychologically significant level and fell as low as $56 per barrel, while the 9¼% Venezuelan government bonds due 2027 sank 3.5 points to 60.5 bid, 62 offered.

Fellow high-beta Argentina was more representative of the category as its 8.28% discount bonds dropped 0.5 point to 27 bid, 28.5 offered.

Low-beta Brazil held up better than some other countries, but the reasons were unclear, Alvarez said.

"It's a larger economy and it should do better over time," he said.

The 7 1/8% Brazilian sovereigns due 2037 fell by 1 point to 93.5 bid, 94 offered.

Also, in Mexico the 5 5/8% bonds due 2017 also dropped 1 point to 89 bid, 89.5 offered.

Emerging Europe rocked

Emerging European traders were kept busy on Wednesday as the major issues were pounded.

As oil continued to fall, Russia was slammed after the government allowed currency reserves backing the ruble to be injected into the illiquid economy.

Stocks, bonds as well as the currency were all battered by the move.

The ruble was seen trading at 27.591 to the dollar.

The Russian five-year CDS was yanked out 170 bps to a spread of 785 bps.

In Ukraine, president Viktor Yushchenko gave up his bid for early elections on Dec. 14, according to the Itar-Tass News Agency.

"There is no reason for holding elections during festivities at the end of the year," Yushchenko said in the report.

Yushchenko made the announcement in Warsaw, Poland, where he met with president Lech Kaczynski.

Yushchenko hoped the elections would consolidate power in the legislature and allow him to form a new coalition after a split with his former ally, prime minister Yulia Timoshenko.

Timoshenko opposed the elections on the grounds that they would cause disarray and instability during a delicate time for the country's economy.

Also in Ukraine, parliament narrowly gathered enough votes to override the Yulia Timoshenko bloc and dismiss the speaker Arseny Yatsenyuk.

In an unsuccessful last ditch attempt to save the speaker, members of the Timoshenko bloc pulled a door off its hinges and damaged the voting machine used to oust the speaker.

Also in emerging Europe, Turkey needs $130 billion in financing to see it through 2009, World Bank country director Ulrich Zachau said, according to reports.

"Economic growth has slowed down both in developed and developing countries as the world economy had become more integrated. This picture is here to stay and everyone should be prepared against it. And Turkey needs $130 billion foreign funds in 2009," Zachau said.

Inflation of the lira and political instability has put Turkey in a vulnerable economic position, but prime minister Recip Tayip Erdogan has, in the past, refused help from the International Monetary Fund to prevent the country from becoming beholden to the lender.

Asia dragged down

"There's not a lot to like here," a trader said about Wednesday's thrashing to all of the markets.

Asia held stronger than at least Eastern Europe, if not Latin America as well, he said.

"LatAm and Asia are considered better overall," he said.

"When emerging markets blew out a couple weeks ago, the weakest link was Eastern Europe," he said.

Still, Asia spent Wednesday falling lower, but like Latin America, it fell evenly.

In the Philippines, the budget will likely run a deficit of PHP 102 billion in 2009, or 1.2% of GDP, finance secretary Margarito Teves testified before the Senate on Wednesday, according to the Manila Times.

The original deficit forecast was PHP 40 billion.

"It will be extremely difficult to balance the budget in 2010 because of the changing circumstances," Teves told reporters, citing a difficult and dynamic "external environment."

Still, spending on many infrastructure projects will continue in order to stimulate the economy, he said.

The Philippine sovereign bonds due 2030 were seen at 100 bid.

In Indonesia, the finance ministry's tax collection arm may miss its collection goal for 2009, the Jakarta Post reported.

"The risk of not achieving the target is definitely there," said the finance ministry director general of taxation, Darmin Nasution.

In 2009, a collection of $60 billion in expected, which would represent 70% of all state revenue.

The global downturn has choked off a large portion of luxury tax collections, but the government is making preparations to follow the spending habits of the wealthy.

"We will prepare measures to be able to achieve the target," Darmin said in the report.

The Indonesian bonds due 2018 were quoted at 70 bid.

Pakistan hikes rates 2%

In Pakistan, a 200 bps lending rate hike to 15% paved the way for a loan from the IMF, reports said.

IMF officials stipulated that the rate hike was a precondition to any sort of loan, and now Pakistani officials may negotiate terms of what will likely be a large economic aid package within the next two weeks.

Pakistan may need at least $5 billion to prevent default on its foreign debt.

Pakistan, which has taken on a central role in the West's battle against terrorism, would join countries such as Ukraine and Hungary, which have received IMF assistance.

The Pakistani government bonds due 2017 were close to unchanged at 40 bid.

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