Emerging markets follow equities higher; LatAm high-beta credits show gains; spreads pull tighter

By Aaron Hochman-Zimmerman

New York, Nov. 24 - Emerging markets improved with the help of U.S. equities, which once again took center stage.

"The concentration is the U.S.," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

On Monday, the markets were propped up by a continuation of what many believe is a Tim Geithner-inspired rally bolstered by the $20 billion bailout package for Citigroup and the press conference held by U.S. president-elect Barack Obama to announce further postings to his economic team.

Still, trading was slow on the first day of an abbreviated holiday week.

"It's already bad," Alvarez said about liquidity, "if you look at the bid-offer spreads, it's really wide."

Investors largely remained uninterested in risk, but there was some buying of Latin America's high-betas.

Argentina led the way by adding 2.5 points to its discount bonds due 2033.

Elsewhere, volatility sank early and stayed low as the Citigroup bailout spiked equities. The VIX index fell 7.97 to 64.70. The index is a common measure of market volatility.

LatAm rides the tides

Even as flows began to seize up on a holiday half-week, Latin America was "a lot better," said IDEAglobal's Alvarez.

"The markets are really on the move here," he said, thanks to a clearer picture of where the Obama administration intends to take its economic policies.

In Venezuela, "prices were up because of the oil recovery, I gather," he said.

Also in Venezuela, the opposition party made small gains in Sunday's elections.

Opposition candidates took control of the governor's offices of three new states, including the most heavily populated, Miranda and Zulia.

President Hugo Chavez's party still controls 17 of 21 states.

Chavez interpreted the results as an affirmation of support for his policies.

The election results indicate "he's lost a slight amount of clout," Alvarez said.

Light sweet crude was seen trading as high as $55 per barrel.

The 9¼% Venezuelan bonds due 2027 added 1 point to 66 bid, 67.5 offered.

Also in Latin America, Argentina was the big winner among the highly watched credits.

The 8.28% Argentine discount bonds due 2033 added 2.5 points to 26.5 bid, 28 offered.

Meanwhile, Brazil's 7 1/8% sovereigns due 2037 added 1.5 points to 91.5 bid, 95 offered.

Emerging Europe active

Emerging Europe remained busy on Monday, a London-based trader said, as Russia's equities led a resurgence.

In Turkey, local investors demonstrated the internal support for a loan from the International Monetary Fund by sending equities up nearly 8.5% on Monday.

Prime minister Recep Tayyip Erdogan initially opposed the terms, which would bring a $20 billion to $40 billion loan to the country. Now a deal with the IMF seems more likely, according to reports.

Also in Turkey, energy minister Hilmi Guler plans to meet with representatives of India and Israel to discuss the joint construction of the Med Stream oil pipeline, according to the Hurriyet Daily News.

The offshore pipeline will physically connect to depots in Israel and Turkey and allow Indian tankers to collect oil at Israeli ports and return through the Suez Canal.

In Russia, more doubts were raised about the overall strength of the economy as the central bank continued to allow for devaluation of the ruble as national oil firm OAO Gazprom was tighter with its supplies.

Gazprom said it will not ship gas to Ukraine without a contract, reports said.

Gazprom insisted that it has worked to avoid a freeze on shipping. Some have speculated that due to its $2.4 billion debt Ukraine would be cut off immediately as the calendar turns to 2009.

"We have worked out a special scheme allowing Naftogaz of Ukraine to pay off, including advance payment for gas transit," he said. "We would like to avoid it."

When debts are settled payment will continue in dollars, unlike Moldova and Belarus, which will now pay in rubles.

The ruble was seen trading at 27.319 to the dollar.

Not your founding father's democracy

Meanwhile, in Ukraine the government will check the pulse of the citizenry regarding NATO membership via text message.

A 15-question quiz will be sent out by the Ukrainian Foreign Ministry in order to gauge people's knowledge and opinion of NATO, the RIA Novosti News Agency reported.

The NATO council rejected bids by Ukraine and Georgia to join the membership action plan (MAP), but the council promised to reconsider membership in December.

Asia improves on U.S. news

Asia was largely flat to slightly tighter for many credits, but some like the Philippines were able to post stronger days.

In the Philippines, the IMF recommended the central bank and banks of other countries in the region cut interest rates in order to spur growth, the Manila Times reported.

"In most countries, where domestic demand is weakening, financial conditions are tightening, and second-round price effects are modest, further monetary policy easing would be appropriate to address downside risks to growth," the IMF said in its November 2008 regional outlook.

"Central banks will need to respond flexibly in the event that domestic credit tightens appreciably and depresses activity," the report continued.

The peso was seen trading at 49.9 to the dollar.

In Indonesia, while the U.S. government was busy putting $20 billion into Citigroup, the Indonesian government's Deposit Insurance Corp. injected $90 million into the illiquid Bank Century.

The injection will allow the bank to return to the minimum legal capital adequacy ratio of 8%, the Jakarta Post reported.

Bank Indonesia deputy governor Siti Fadjrijah noted that the capital adequacy ratio fell to negative 2.3%.

In Pakistan, the market waited to hear a decision from the IMF about the first portion of the $7.6 billion loan promised to Karachi.

The market was forced to wait another day to find out when $3.5 billion to $4.5 billion may be in Pakistani hands.

Elsewhere in corporates, South Korea's depressed chipmaker MagnaChip Semiconductor LLC saw its floating-rate notes trading at 6 bid on Monday, but there was "not a lot going on in that name," a trader said.

The bonds were slightly lower than a 6.75 bid on Friday.

Another trader said there was similarly little activity for the company's other issues.

MaganaChip defaulted on a loan at the end of October but was given until Dec. 10 by its creditors to restructure its debt.

In a Friday filing with the Securities and Exchange Commission, the company said it expects to be in default through the end of November.

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