Emerging markets end session strong; LatAm sprints forward on light flows; Asian bonds creep higher

By Aaron Hochman-Zimmerman

New York, Dec. 17 - Emerging markets showed positive movement on light flows, while sentiment made progress of its own, even if it proves short-lived.

"I think the big news of the day is oil," a syndicate official said Wednesday.

OPEC announced a 2.2 billion barrel per day cut, with support from Russia and Azerbaijan, but prices were determined to drill lower, dipping below $40 per barrel.

"Guess what? It's not enough," the syndicate official said.

"The fear of the global recession is really the driving factor," he said, "not the fundamentals."

"They'd have to cut it completely; I don't see anything spiking in the near future," he said.

The drop in oil prices was not enough to check climbing prices, even among the oil producers.

Brazil, Russia and Venezuela all saw their benchmark issues improve.

The 11% Brazilian bonds due 2040 added 5 points to 126 bid, 127 offered.

Elsewhere, despite a huge drop for the dollar, the U.S. government will continue to leave rates low as long as possible, the official said.

"Expect more of the same for the time being," he said about Washington, D.C., doing everything it can to spark growth in the U.S. economy.

Equities remained mixed for most of the day but were overcome by a late-day spate of selling.

Meanwhile, volatility fell by 1.45 to 49.84, according to the VIX index. The index is a commonly used gauge of market volatility.

Treasuries jumped again as emerging markets narrowed by 35 basis points to a spread of 720 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm charges ahead

Latin America held up "extremely well," according to a syndicate official, but "given that liquidity is really trickling off, I'm not going to make a big deal out of it."

"Treasuries continue to rally," he said, "which is actually benefiting Latin America."

CDS spreads were improved. "All the indices we've been watching, everything is tighter by 25 bps, 50 [bps] in the last week."

"Looking across the curve, everything was up today, even Vene," he said, despite the big cut in oil production.

Venezuela's 9¼% Venezuelan sovereign bonds due 2027 added 1.75 points to 56 bid, 58.875 offered.

Brazil saw a big jump as its highly traded 11% bonds due 2040 jumped 5 points to 126 bid, 127 offered.

In Argentina, president Cristina Kirchner called for great actions from the "central countries," which she blamed for causing the global financial crisis.

She made the comments before a summit meeting of Unasur-Mercosur-Rio Group leaders from around Latin America and the Caribbean, according to the Buenos Aires Herald.

The 8.28% Argentine discount bonds due 2033 improved by 1.75 points to 30 bid, 31.25 offered.

Elsewhere around the sector, Colombia's 7 3/8% bonds due 2017 added 1 point to 100 bid, 101 offered while Peru's 8 3/8% bonds due 2016 were better by 2 points to 107 bid, 109.5 offered.

Mexico's 5 5/8% bonds due 2017 were quoted at 99.25 bid, 101.25 offered.

Quiet Asia lags LatAm

While the other sectors were climbing higher, Asia was "kind of quiet," a trader said. "LatAm definitely outperformed."

Asia was "mildly tighter" he said, as there is "a growing consensus that Asia will be the last to react to this global recession."

The Western markets may fall and recover before Asia is seriously affected, he said.

Meanwhile on Wednesday, the big names like the Philippines and Indonesia added a few points, but "CDS wasn't much tighter today at all," he said.

In the Philippines, central bank governor Amando Tetangco said the rate cut by the U.S. Federal Reserve allows the Philippine central bank more latitude to adjust rates.

"The Fed move, to the extent it would be effective in spurring credit extensions by the private sector, would be positive for the rest of the economies in the world, including the Philippines," Tetangco said, according to the Manila Times.

Investors are expecting cuts from the monetary policy committee during its meeting on Thursday.

The interest rates currently stand at 6% for the overnight borrowing and 8% for overnight lending rate.

The peso was seen trading at 47.165 to the dollar.

The Philippines sovereign bonds due 2030 took on 3 points to 110 bid, while the Indonesian bonds due 2018 were quoted at 81 bid.

Elsewhere in Thailand, the popular king, Bhumibol Adulyadej, threw his support behind the new British-born prime minister, Abhisit Vejjajiva.

Abhisit has built a reputation for honesty and pledged to reform Thailand's "failed politics," he said, according to reports.

Also, Pakistan's bonds due 2017 were little changed at 37 bid.

Emerging Europe spreads narrow

Emerging Europe continued to benefit from narrowing spreads as Treasury yields continued to sink.

In Russia, the government agreed to support OPEC's larger-than-expected 2.2 million barrel per day production cut with a 600,000 barrel per day cut of its own.

"As you know, Russia shares first-second place with Saudi Arabia in terms of crude production, so we should develop this cooperation in a natural manner," deputy prime minister Igor Sechin told reporters at the OPEC conference in Oran, Algeria, on Wednesday.

Sechin indicated that Russia would like to join OPEC, first by holding 'observer' status, before progressing to full membership in the cartel.

Moscow intends to hold its own forum for fuel exporters on Dec. 23.

As oil prices sank below $40 per barrel, the Russian sovereign bonds due 2030 tacked on 3 points to 84 bid, 85 offered.

Meanwhile in Ukraine, the total foreign debt topped $105 billion as of Oct. 1, compared to $74 billion at the same point in 2007, according to a central bank statement.

Ukraine continues to suffer with a fragile government and steep gas debts to Russia.

The tepid peace between prime minister Yulia Timoshenko and president Viktor Yushchenko helped forge a new coalition between their respective blocs along with the bloc of Vladimir Litvin; however, almost any vote is doomed to fail with the likely abstention of the Communist Party.

Many of parliament's legislators do not believe the coalition will survive for very long, the Itar-Tass News Agency reported.

Also in emerging Europe, Turkey received a €343 million loan from the World Bank, according to a statement from the international lender.

The loan is intended to support "reforms aimed at promoting growth and job creation," the statement said.

"Turkey's [reform] program aims to improve international competitiveness and the conditions for private investment and the creation of jobs, particularly in the formal sector," said Ulrich Zachau, country director for Turkey.

The loan will mature in 2032, but carries a grace period of another 12 years.

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