Emerging markets mixed; light flows start week; Ecuador on brink of default, bottom-fishers step in

By Aaron Hochman-Zimmerman

New York, Nov. 17 - Emerging markets sputtered in its attempt to start the week on Monday as investors showed little motivation to move levels in either direction.

Equities as well as "more rumors" and "more questions about [General Motors]" took the forefront of what held the power to drive emerging markets.

Ecuador provided most of the internal action.

Its debate over whether or not to make a scheduled payment on its bonds due 2012 initially spooked some investors but also piqued the interest of bottom-fishers.

The bonds due 2012 added 9 points since Friday as they traded at 23 bid, 28 offered.

Ecuador has defaulted before, but the reoccurring issue is now complicated by a strong investment in the economy by its closest political ally, Venezuela.

From the equity side, markets sank as volatility added another 2.84 to end at 69.15, according to the VIX index. The index is a frequently used gauge of market volatility.

LatAm wakes slowly

Latin America slowly shuddered to life on Monday as markets in Colombia and Mexico were closed.

Flows were very light as "we will have to assess what's going on," a strategist said.

"It has been very volatile and will continue to be very volatile," he said.

Similarly, it is too difficult to determine when things will pick up before Thanksgiving in the United States, he said,

The market is a "day by day" market versus a "week by week" market," he said.

One of the more liquid issues in the category, Brazil's 11% bonds due 2040, was quoted at 116.25 bid, 116.75 offered, while "Argentina is doing a little better this afternoon," he said.

The 8.28% Argentine discount bonds due 2033 added 0.25 point to 26 bid, 27 offered.

Neither credit was able to make a major splash, he said, even as the news of a possible default by Ecuador, which broke on Friday, had mostly gone stale.

Specter of default

"It clearly is a negative event for the credit itself," he said about the possibility of default, adding that most of the price action has already been absorbed by the market.

Still, Investors started to worry for the economies linked to Ecuador.

"It would seem that the effect of a default has effects on even Ecuador's allies," the strategist said.

Venezuela holds swaps which would be damaged by an Ecuador default, but its 9¼% bonds due 2027 were seen lower by only 0.15 point at 65.1 bid, 65.9 offered.

"You can't really make heads or tails of it," a syndicate official said.

During the session, Ecuador's 9 3/8% bonds due 2015 were up 4 points, he said.

Still, "they've done this before," he said about an Ecuador default, adding that the Correa government "better think twice" about defaulting on the derivative contracts held by Caracas.

"It would be stupid to bite the hand that feeds you," he said.

The nearly $800 million Caracas would stand to lose is not enough to seriously effect the Venezuelan economy, but "it's symbolic," the official added.

The 12% Ecuadorian sovereigns due 2012, which are under the 30-day grace period for a Nov. 15 interest payment, were seen back up 9 points at 23 bid, 28 offered.

Asia lifeless

Emerging Asia was "dead, just dead" on Monday, "not good, not bad, just dead," a trader said, while in Japan officials mustered the strength to admit what the European Union and the United Kingdom have already said.

The Japanese economy is officially in recession after shrinking 0.1% in the third quarter and 0.9% in the second quarter.

"We need to bear in mind that economic conditions could worsen further as the U.S. and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings," economy minister Kaoru Yosano told reporters.

Elsewhere in the Philippines, the government lowered its growth expectations for 2008 in light of the global economic crisis.

The 2008 GDP target was lowered to between 4.1% and 4.8% from between 5.5% and 6.4%, the central bank said in a news release.

Projections for 2009 were cut to 3.7% to 4.7% from 6.1% to 7.1%.

"Given the extreme volatility in the global economy, we are taking a very conservative stance in our economic projections and, because of this, we have chosen to align our growth targets with recent external developments that may generate knock-on impact on our overall economic activity," said Rolando Andaya, chairman and budget secretary of a special cabinet-level committee to review the economy.

The bank also expects that devaluation of the peso against the dollar will remain unchanged for 2008, but that in 2009 the peso could reach PHP 42 to PHP 45 against the dollar.

The peso was seen trading at 49.793 to the dollar.

The Philippine sovereign bonds due 2030 were seen at 103 bid.

In Indonesia, Russia's defense and aviation firm Rosoboronexport, which owns Sukhoi, will exhibit for sale its new fighter, the Su-35 Flanker along with civil jets, such as the Superjet 100 medium-haul airliner, according to the RIA Novosti News Agency.

In addition to possible sales at the Jakarta air show, Indonesia has already agreed to purchase six Su-30 Flanker fighters, Mi-17 and Mi-35 combat helicopters as well as mechanized infantry vehicles.

The Indonesian government bonds due 2018 were quoted at 66 bid.

Pakistan gets $7.6 billion from IMF

Also in Asia, Pakistan and the International Monetary Fund agreed to a deal that will provide a loan totaling $7.6 billion to the ailing nation.

The IMF's board has not yet approved the loan, which would send up to $4 billion to the Pakistani treasury before the end of the year.

"There was a non-reaction today," the trader said, but "it's a material positive for the credit."

There are still "a lot of people who are nervous" about Pakistan, but the future continually looks brighter and accounts are showing more interest, he said.

The Pakistani sovereigns due 2017 were difficult to price, but would likely trade near 40 bid, the trader said.

Emerging Europe eases lower

Emerging Europe traded slightly wider on low flows with little equity leadership on Monday.

Investors continued to stand by and watch the political developments as many investors have already sold their risky assets.

In Russia, while the world debates the results of the G-20 summit in Washington, D.C., the Russian government said none of the agreements-in-principle will interfere with its own economic reform package.

"Nobody discussed correction of the plan. In principle, there are no contradictions with the measures that had already been adopted," said deputy finance minister Dmitry Pankin, according to the Itar-Tass News Agency.

The Russian sovereign bonds due 2030 gave up 1 point to 82 bid, 82.5 offered.

In Turkey, consumer confidence fell by 8% in October, the Turkish Statistics Institute reported, according to the Hurriyet Daily News.

Consumers sighted the lack of purchasing power as the lira continued to suffer from inflation.

The government also announced a 9.8% unemployment rate in August, up from 9.2% in August, 2007.

The new, disappointing figures pushed the government closer to reaching a deal with the IMF, the report said.

The lira was seen trading at 1.637 to the dollar.

The Turkish government bonds due 2030 dropped 1.5 points to 122 bid, 126 offered.

Also in emerging Europe, investors remained skittish of Hungary after Standard & Poor's cut the country's credit rating to BBB from BBB+.

The city of Budapest's ratings were also lowered to BBB from BBB+.

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