Emerging markets weaken on slow markets, data; Brazil thrown back; primary at standstill

By Aaron Hochman-Zimmerman

New York, Feb. 5 - Low volumes kept the bleeding in check around the emerging markets on Tuesday.

A return from Carnival in Latin America, the upcoming New Year's holiday in Asia and December's 2% loss in euro retail sales combined to form the perfect storm of low liquidity in emerging markets.

While the primary pipeline was completely cut off, usually stable Brazil led the way down in the secondary with a loss of 1.6 from its sovereigns due 2037.

Still, emerging markets were only moderately affected by the 370.03 loss from the Dow Jones Industrial Average which closed at 12,265.13, a trader said.

It was hard to determine the exact effects the major market slide had on the developing world, but "the backdrop weakened," another trader said.

Asia and emerging Europe were both weaker overnight which translated into weakness in the American time zone.

"I think this has the same general script attached to it," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Risk aversion had the tightest grip on market sentiment during Tuesday's session, he said.

While equities were tumbling backwards, volatility hit a plateau in the morning and remained there through the afternoon to close higher by 2.25 at 28.24, according to the VIX index. The index is a commonly used measure of market volatility.

With the day's 370 point loss from the Dow Jones Industrial Average, Treasuries had room to run and emerging markets spreads were pulled wider. JP Morgan's EMBI+ index was seen wider by 10 basis points at a spread of 280 bps. The EMBI+ determines the amount of extra yield investors will require to hold money in emerging markets debt.

Emerging Europe softer still

Investors in emerging Europe were left hurting as equities fell in Europe and the United States on the news of a 2% decline in December's euro-based retail sales.

Volumes remained low as macro fears left investors in no mood for greater risk, a trader said.

Russia's economy will not face the liquidity crisis which has gripped the rest of the world's markets, Vneshtorgbank president Andrei Kostin told the congress of Russian Industrialists and Entrepreneurs on Tuesday, according to the Itar-Tass News Agency.

Russia will be protected by its cash reserve which is the third largest in the world, he added.

Also, the United States and Russia will soon hold high-level talks about trade policy in Washington D.C.

Diplomatically, the two countries have been at odds over the proposed missile defense systems the United States plans to build in Eastern Europe.

The Russian government bonds due 2030 were lower by just 0.05 to trade at approximately 115.125 bid, 115.25 offered.

Turkey's air force hit approximately 70 targets believed to be held by Kurdish rebels in Northern Iraq.

The raids were conducted against villages along the Iraqi border thought to harbor Kurdistan Workers' Party (PKK) fighters.

The Turkish sovereign bonds due 2030 slid 1.3 to trade at 155.7 bid, 156.2 offered.

Ukraine's bid to join the World Trade Organization was approved Tuesday by the general council.

The Ukrainian bonds due 2016 were quoted flat at 100.25 bid, 100.75 offered.

Elsewhere, in Serbia prime minister Vojislav Kostunica voiced his objections to the proposed European Union police mission to Kosovo.

Kostunica indicated that the E.U. presence would effectively subvert Serbian sovereignty by granting Kosovo its de facto independence.

Recently re-elected Serbian president Boris Tadic is in favor of closer relations between Belgrade and Brussels.

LatAm, low and slow after Carnival

Latin American markets reopened after Carnival to low volumes and lower prices.

Equities and external jitters kept risk off the minds of Latin American traders, said IDEAglobal's Alvarez.

Latin America took some cues from the United States on Tuesday, where the fears of a recession seemed more realistic or at least the fear of a more intense recession was on the rise, he said.

In Europe, retail sales figures knocked equities lower.

"Latin America is no different than the other markets," he said.

"LatAm didn't do a lot, but it's been negative," he said.

Brazil was the hardest hit during Tuesday's session.

The 11% government bonds due 2040 were not representative of the rest of the curve as they dropped only 0.2 to trade at 133.9 bid, 134 offered.

The 7.125% bonds due 2037 were more in line with the rest of Brazil's debt, falling 1.6 to trade at 107.9 bid, 108 offered.

Argentina's 8.28% discount bonds due 2033 were lower by 0.6 to trade at approximately 92 bid, 92.4 offered.

Venezuela's 9.25% bonds due 2027 held in fairly well, Alvarez said.

The bonds were quoted down only 0.35 at 101.45 bid, 101.6 offered.

Asia slow ahead of New Year

In combination with the other factors weighing on liquidity in the other sectors, Asia began to slow down ahead of the New Year holiday on Feb. 7.

The movement traders were able to find on Tuesday was in the direction of wider spreads.

"The benchmark indices and CDS were significantly wider," a trader said.

The high yield index was 25 bps wider in the United States as compared to the tights in Asia's overnight trading, he said.

However, "we've got sovereign cash that remains reasonably well bid," he said.

"The market is probably a bit, very thin," he said, "So it's hard to draw conclusions."

In the Philippines, the national statistics office reported an inflation rate of 4.9% in January, according to its website.

The central bank forecast estimated the inflation rate would fall between 3.7% and 4.4%, according to a report in the Manila Times.

Higher commodity prices were blamed for the higher than expected inflation figures.

Also, parliament speaker Jose de Venecia, a 12-year veteran of the post, was removed amidst corruption charges.

The move will likely increase president Gloria Arroyo's influence over the legislature, a BBC analyst said.

De Venecia expressed his intentions to join the opposition.

The five-year CDS was seen 10 bps wider and the Philippine sovereigns due 2030 were lower by 0.5 to trade at 132 bid, 132.5 offered.

In Indonesia, the government put a hold on talks with ExxonMobil regarding its proposed development of the Natuna D-Alpha gas reserve.

The reserve is reportedly the largest natural gas field in Southeast Asia, according to the Jakarta Post.

The Indonesian sovereign bonds due 2018 fell by just 0.125 to 103.25 bid, 103.75 offered.

Pakistan's sovereigns which had shown progress in recent sessions retreated by approximately 1 point.

The issues due 2017 were quoted at 84 bid, 87 offered.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.