Emerging markets inch higher; Ecuador looks for sympathy, bonds strengthen; strong buying in Asia

By Aaron Hochman-Zimmerman

New York, Dec. 9 - Emerging market spreads were tighter and prices higher in many cases on Tuesday.

Still, "I wouldn't get too carried away," a trader said.

With all of the recent success, "we're around where we were Monday last week," he said. "Pretty much all of the widening had been taken out."

"I'm hoping things will start to wind down now," he added, echoing a growing sentiment among market watchers.

Others are also seeing bright spots where investors may be "tired of selling," an analyst said.

"I think investors were telling us something with the recent moderating of outflows from most fund groups amid the gloom, and the decisive return to inflows in some select fund groups, such as Europe and China equities," he said.

In trading, Ecuador campaigned for support to default on the bonds due 2012, but despite the doubts over payment, the issue was stronger as the bonds due 2012 added 2 points.

Equities in the United States gave back most of Monday's gains, but volatility crept slightly higher by 0.42 to end the day at 58.91, according to the VIX index. The index is a common measure of market volatility.

Treasuries helped tighten down emerging markets as spreads tightened by 13 basis points to 732 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept to hold assets in emerging markets day.

LatAm sticks to U.S.

Latin America's markets largely kept in step with the U.S. markets on Tuesday.

"There's nothing else cooking today," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The market is "less and less liquid," he said, adding "it's just the dates."

"People are less willing to take a big risk at this time," he said.

Meanwhile, Argentina president Cristina Kirchner met with Russia prime minister Vladimir Putin as Russia continued to increase its presence in Latin America.

Currently, trade between the two countries amounts to $1.4 billion, but "there are opportunities for cooperation in the spheres of nuclear energy, space and other spheres of high technology," Putin said, according to the RIA Novosti News Agency.

Kirchner noted that through discussions the countries found "proof of friendship and readiness for cooperation."

The 8.28% Argentine discount bonds due 2033 fell 0.25 point to 28.25 bid, 30 offered.

"Venezuela, Argentina and Ecuador are all moving in the same direction," Alvarez said about a movement within Latin America to create a sort of anti-United States and Western Europe partnership.

The 9¼% Venezuelan bonds due 2027 also lost 0.25 point to 63.5 bid, 65 offered.

Also, Brazil's 7 1/8% Brazilian bonds due 2037 added 1.25 points to 98 bid, 99 offered.

Ecuador lobbies for support

Elsewhere in Latin America, Ecuador was busy attempting to drum up support from its neighbors for defaulting on its bonds due 2012 and 2015.

Ecuador has long been cutting a zig-zag pattern with conflicting statements concerning payment, but now the government seems to have taken a tack back in the default direction.

Representatives of the Quito government visited countries in the region as well as the United States ahead of a possible decision to miss payments on Dec. 15; still, the bonds were "somewhat firmer," Alvarez said.

The 12% bonds due 2012 were up by 2 points to 33 bid, while the 9 3/8% bonds due 2015 were lower by 1.5 points at 28.5 bid.

Asia improving

In Asia, "the market has been very, very strong the last two days," a trader said, although it was a touch softer at close.

Help came from the major markets as "the decent bounce in equities has helped a lot," he said.

However, "Indonesia saw some funding from multi-laterals," he said, referring to a $350 million loan from the Asian Development Bank, which "took out some of the supply risk."

"There's been a lot of buying in Indo cash bonds," he said, adding that "the Philippines lagged a bit" until Tuesday when there was "good buying from the locals."

"Prices are sharply higher," he said, which "has been good for the tone."

Also in the Philippines, government debt increased by PHP 76 billion, or 1.9%, from August to September, according to a statement from the Bureau of Treasury.

The increase leaves the total debt outstanding at PHP 4.1 trillion, with 42% owed to foreigners and 58% owed to domestic creditors.

The Treasury attributed the 4% increase in foreign debt during the period to the depreciation of the peso against the dollar, the statement said.

On Tuesday, the peso was seen trading at 48.685 to the dollar.

The Philippine government bonds due 2030 were quoted at 105 bid, 108 offered.

In Indonesia, the European Union and India complained to the Industry Ministry that a plan to eliminate the value-added tax on locally produced raw materials may violate World Trade Organization rules, the Jakarta Post reported.

Treating imported and locally produced raw materials differently runs contrary to the WTO's principles; however, the two only expect clarification of the possible change in policy.

Still, in the 2009 budget the government has held 12.5 billion rupiah to replace revenue lost under a VAT tax cut.

"What we're trying to do is save our domestic industry from the impact of the global economic turndown, much like the U.S. has done with Citibank and General Motors," said Ansari Bukhari, the Industry Ministry's director general for metal, machinery, textile and miscellaneous industries.

The Indonesian sovereigns due 2018 were seen at 73 bid, 77 offered.

In Pakistan, the bonds due 2017 remained difficult to price in the neighborhood of 40 bid.

Emerging Europe wraps tighter

Emerging Europe continued to see improved flows as spreads tightened around the sector.

In Russia, the government intends to cancel military projects with Ukraine after it was found that Kiev sold armaments to Georgia, the Itar-Tass News Agency reported.

Still, Ukrainian president Viktor Yushchenko called for a stronger relationship between his government and Russia.

"Ukraine does not advance any preliminary conditions to Russia for maintaining friendly good-neighborly relations," he said.

Yushchenko's comments still included a hint toward a desire to join NATO, which Russia has opposed.

"I do stress that we are interested in partnership between Ukraine and Russia becoming part of the common European process," he added.

Also in emerging Europe, Turkey was pressed to quickly sign an agreement with the International Monetary Fund by Andrew Vorkink, the former Turkey Director of the World Bank, according to the Hurriyet Daily News.

In order to ease the effects of the global financial crisis the country needs to seek help from the IMF as well as coordinate financial policy with the world's major players such as the U.S. Federal Reserve and European Central Bank, he said.

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