Emerging markets end mixed; Russia bashed on lower cash reserves; governments try policy changes

By Aaron Hochman-Zimmerman

New York, Nov. 13 - Emerging markets closed the session with the benefit of a U.S. equity rally after beginning the day sluggishly thanks to the horrid Asian overnight session.

Governments around the emerging market sectors were busy on Thursday announcing policy changes in order to attract new liquidity into their respective markets.

Russia remained under fire as the government announced a drop in its cash reserves.

In their own attempts to deal with the global slowdown, Brazil adjusted its commercial bank reserve policy, while Argentina continued to pursue a pension fund nationalization and Turkey sliced taxes on investment.

"The [world's] economy looks worse and worse everyday," a trader said.

"Now we're waiting for GM and Ford and all the rest," he said during London's afternoon.

Still, "rates are heading aggressively lower," he said as the TED spread was seen at 1.96.

"Sterling is falling off a cliff," he said.

Sentiment was much improved by New York's close.

Volatility spent most of the session higher than Wednesday's close, but the late-day rally cut volatility by 6.63 to close at 59.83, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, with Treasuries on the run, emerging market spreads remained unchanged at a spread of 653 basis points. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

Emerging Europe crunched

Emerging Europe lagged the other two sectors on Wednesday and continued to suffer during Thursday's session.

"It's all weaker, with a few bright spots," a trader said.

In Ukraine, defense minister Yuri Yekhanurov said the country is ready to begin the NATO accession process, but NATO members remain hesitant.

"We speak about reforms in the country and its armed forces," Yekhanurov said during a meeting with NATO defense ministers in Estonia, according to the Itar-Tass News Agency.

Still, "there is still no talk of Ukraine's accession to NATO," he said.

In Turkey, parliament set taxes friendly to both foreign and local investment in the economy.

Rates of 2% on foreign investment and 5% on local investment were set by lawmakers, according to the Hurriyet Daily News.

The law also stipulates that no questions may be asked about the source of the capital.

"They're just saying show us the money," the trader said.

Russia 'bears the brunt'

Still, from the entirety of emerging markets, "Russia seemed to bear the brunt of it," he said.

"The Micex was shut down again," he said.

"It'll be closed till next week," he joked.

Also in Russia, gold and currency reserves were thinner as of Nov. 7, the central bank said in a press release.

The bank posted a total reserve of $475.4 billion, or $9.2 billion lower than the $484.6 billion it held on Oct. 31.

"They throw money at [the problem] and the perception is that it's a sign of weakness," he said.

Russian issues are trading at discounted levels, but "there's not too many people with funds to go after it," he said.

The ruble was seen trading at 27.305 to the dollar.

Argentina, Brazil fight for liquidity

In Argentina, the pension nationalization plan took one more step through the legislative process.

Eighteen of 30 senators in the budget and social security committees approved the measure for debate on Thursday, according to the Buenos Aires Herald.

The lower house already approved the measure on Nov. 7.

If passed the government would assume control of $23 billion in assets.

Also in Latin America, Brazil's central bank allowed commercial banks to keep less cash in reserve in order to increase liquidity in the market.

Banks will now be allowed to cover their requirements with government bonds rather than currency.

The move is expected to free 40 million reals.

The real was seen trading at 2.312 to the dollar.

Asia works past overnight woes

Asian markets at least had the benefit of the late-day U.S. equity rally after a terrible showing by the Asian overnight markets.

In Indonesia, sharia banking has seen an uptick in business as conventional banking suffers around the world, according to the Jakarta Post.

Both total assets and lending volume stands to increase by 20% to 30% in the sharia-compliant sector, said Ramzi Zuhdi, Bank Indonesia's sharia banking director.

Sharia banks make up only 2% of the financial sector in Indonesia, but the government hopes to grow the sector to 5% by 2010, the report said.

Sharia-compliant banking is not conducive to complicated derivatives, which helps preserve its transparency and fights unnecessary risks, said Siti Fadjriah, Bank Indonesia deputy governor.

Philippines to increase 2009 borrowing

Meanwhile in the Philippines, the Finance Department said the government may increase borrowing during 2009.

Foreign borrowing is expected to hit PHP 123 billion, up from PHP 115 billion.

The government hopes to secure the financing from international lenders such as the Asian Development Bank and the World Bank.

Under the 2009 projection, local borrowing, in the form of T-bills and notes, would also increase to PHP 510 billion from PHP 437 billion.

The source of financing will remain close to the current program, which accepts 24% of investment from foreign lenders and 76% from domestic lenders.

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