Emerging markets hold still; Ecuador's bonds sink nearly 2 points on mixed signals; tone improves

By Aaron Hochman-Zimmerman

New York, Dec. 4 - Emerging markets began the day stronger as the market reacted to a series of coordinated rate cuts from central banks around the world.

However, as the session went on, the early success slipped away as issues ended mostly unchanged.

"There's only so much that will do," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, about the rate cuts.

In trading, the tone felt better although liquidity remained light and bid-offer spreads remained wide.

Ecuador was the day's dud as mixed signals from the government regarding a possible default sent jittery investors away from the credit.

Ecuador's bonds due 2015 and 2030 each were lower by nearly 2 points.

From the major markets, volatility spiked by 2.92 on the late-afternoon equity sell-off. As a result the VIX index ended Thursday at 63.64. The index is a commonly used measure of market volatility.

Treasuries won over more investors on Thursday as emerging markets widened by 1 bp to a spread of 762 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept in order to hold assets in emerging market debt.

LatAm mixed to lower

Latin America was in the middle of a mildly down day by New York's afternoon, according to IDEAglobal's Alvarez.

The majority of issues were close to unchanged, but "there has been some backpedaling in Ecuador," he said.

"They're playing cat and mouse with the market," he said as the government, which frequently changes its tune, looked for ways to release itself from the debt it considers illegal.

The 12% bonds due 2012 held still at 31 bid, 35 offered even as Quito still owes an interest payment on the debt.

The bonds due 2015 and 2030 were lower by nearly 2 points each.

"Argentina also seems to be softer," Alvarez said, as the government has been slowly admitting that money from the nationalized pension funds will be used to fund other government programs.

Elsewhere in Argentina, the House of Representatives passed a bill that will allow for the nationalization of Aerolineas Argentinas.

The country's largest airline, now owned by Spain's Grupo Marsans, still carries nearly $900 million in debt.

The bill must now face a vote in the Senate.

"The expectation we have, as far as we know, is that it's going to be approved because in general everyone supports the expropriation, since the price set by Congress was not accepted," said transport secretary Ricardo Jaime as the government has not been able to agree to a price to buy the airline from Marsans.

The 8.28% Argentine discount bonds due 2033 fell 1.25 points to 28 bid, 30.5 offered.

In Venezuela, oil prices as low as $44 per barrel continued to put downward pressure on bond prices.

Also, the navy finished its exercises conducted with ships from the Russian fleet on Thursday.

After the maneuvers, Russia's prime minister Vladimir Putin said that the Russian military will not establish a permanent presence in the region.

"There is no need to build permanent bases, although we have such agreements with the Venezuelan leadership," he said on Russian television.

"I do not think the Cuban leadership would object either. If necessary, we will be able to use these countries' ports to refuel and replenish supplies for our warships," he said.

The 9¼% Venezuelan sovereigns due 2027 fell 1.125 points to 63 bid, 65 offered.

Meanwhile, Brazil's 7 1/8% bonds due 2037 added 0.85 point to 95.35 bid, 97.75 offered.

'Tone is softer' in Asia

The Asian market "is weaker ... the tone is softer," a trader said.

Still, compared to recent lows "the technicals are so much better," he said.

"The flows that we're seeing are much more constructive than a month ago," he added.

The U.S. and European investment-grade markets are severely underperforming emerging Asia as the CDX index was close to all-time wides, the trader said.

Meanwhile, emerging Asian standbys such as the Philippines were offered at 490 bps, compared to the wides at 865 bps.

Indonesia, which has been a more recent underperformer, is still 500 bps off of its wides, the trader said.

In terms of cash bonds, "not a whole lot is trading," but technicals remain markedly improved, he said.

The Philippine government bonds due 2030 were lower by 0.5 point to 102 bid, 104 offered.

In Pakistan, the sovereigns due 2017 were quoted at 37 bid, 44 offered.

Indonesia cuts rates to 9.25%

In Indonesia, the central bank cut rates 25 bps to 9.25%, according to a statement from the central bank.

The bank was able to cut rates as "inflation in November 2008 fell to the lowest level for that month in several years," the statement said.

Also, while annual inflation is expected to total between 11.5% and 12.5%, "the 6.5%-7.5% inflation target for 2009 is regarded as achievable, with even the possibility of nearing the lower limit of this band," the bank said.

The rupiah was seen trading at 11,977.06 to the dollar.

The Indonesian sovereigns due 2018 slipped 1 point to 68 bid, 70 offered.

Emerging Europe holds on cuts

Emerging Europe stayed generally flat as expected rate cuts came in from the ECB and Bank of England.

The cuts helped issues early in the session, but successes proved to be short-lived as trading continued.

In Russia, 2008 inflation may hit 13.5%, said economic development minister Elvira Nabiullina, according to the Itar-Tass News Agency.

As of Wednesday, accrued inflation stands at 12.5%, she said.

"It is necessary to achieve a decrease in the inflation rate in 2009," she said in the report, as president Dmitry Medvedev called the odds of reducing inflation in 2009 "not bad."

The ruble was seen trading at 27.945 to the dollar.

Also in Russia, prime minister Vladimir Putin said he will decide whether or not to run for president closer to the end of Medvedev's term in 2012.

Putin also encouraged renewed relations with Ukraine and pressed its neighbor to pay its $2.4 billion in gas debt.

"If our partners do not fulfill the agreements or, as in previous year, permit themselves to illegally tap our resources from a transit pipe, we will be forced to cut down the supply. What else can we do?" he said on Russian television.

Elsewhere in emerging Europe, Turkey is on track to sign a deal with the International Monetary Fund before the end of the year, said prime minister Recep Tayyip Erdogan, according to reports.

If talks continue to progress, the government will accept what is likely to be a $20 billion to $40 billion loan.

Previously the government refused to accept the terms of an IMF loan.

Erdogan also said that his economic team is not planning to enact any value-added taxes.

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