Emerging markets survives equity plunge; high grade leads trading; primary pipeline bent

By Aaron Hochman-Zimmerman

New York, Feb. 29 - Emerging markets credit stayed afloat on rocky equities seas on Friday as stocks hemorrhaged, including a 315-point, or 2.5%, drop in the Dow Jones Industrial Average.

"If you look back in retrospective, the week has been full of lousy economic data," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Early in the week equities were pumped up as, "S&P and Moody's got to play nice guy," he said, as they affirmed the AAA ratings of the monoline insurers.

Also, the beginning of the week brought the expectation of further rate cuts from the Federal Reserve Bank, he said.

However, "everything's already in shambles and the Fed doesn't have a lot of punch left," he said.

The key is "what happens to the muni market and how they fix that," he said.

Still, "our friends throughout EM are doing relatively well," he said, and "I find that to be remarkable."

Chile led the charge among the investment-grade winners as it tacked on 1.25 points to its bonds due 2013.

"It's not near as panicked," a trader said about the market's tone, despite the disappointing data and the subsequent equity reaction.

"It's a fresh month, for what that matters," another trader said, although "the big picture isn't really changing."

"The volatility is still there, the fear is still there and we're seeing that today ... Treasuries are going crazy, the stock market is taking a beating," he said on Friday.

The cause of the pain for emerging markets is external, he said.

"It's got nothing to do with the credits that I look at, absolutely not," he said.

Volatility ran fast out of the gate and kept its pace to end higher by 3.01 at 26.54, according to the VIX index. The index is a commonly used measure of market volatility.

"Treasuries are going crazy, cash prices aren't changing," a trader said as emerging markets was yanked wider by 11 basis points to a spread of 289 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will require to hold assets in emerging markets debt.

LatAm finds shelter from storm

As a week of compounding bad news caught up to equities, Latin American credit showed some resiliency in prices, even as many spreads were stretched wider by charging Treasuries.

"Obviously, we had a very large move in Treasuries," IDEAglobal's Alvarez said.

And as an investment-grade credit, "Chile is tracking Treasuries tick by tick," he said.

The Chilean bonds due 2013 were better by 1.25 points at 106.6 bid, 107.05 offered, with a spread tighter by 11 bps.

Mexico held in very well, Alvarez said, as the 5 5/8% bonds due 2017 were up by 0.65 point at 104.15 bid, 104.35 offered, with a spread wider by 5 bps.

"Peru is a standout again, especially toward the long end; it's been pretty positive," Alvarez said.

The Peruvian 7 3/8% bonds due 2025 were better by 0.9 point and spotted at 112 bid, 113 offered, with a spread 1 bp wider.

Venezuela's 9¼% sovereigns due 2027 fell 1 point to 98.5 bid, 99.05 offered.

Brazil's 11% government bonds due 2040 added 0.45 point and were spotted at 134.45 bid, 134.55 offered.

Elsewhere, in Ecuador a landslide shut down the country's primary oil export pipeline, the BBC reported.

The state-run oil company Petroecuador will attempt to use other pipelines to move the approximate 400,000 barrels the damaged pipeline carries.

Cabinet squabbles in Argentina

In Argentina, the bonds were notably weaker, according to Alvarez, as the government readies itself to introduce reforms to its economic statistics and census agency, called Indec.

During the preparations, rivalries have flared among the cabinet ministers over the details of the plan.

President Cristina Kirchner attempted to dispel rumors that economy minister Martin Lousteau may resign over an argument with domestic trade secretary Guillermo Moreno.

The 8.28% Argentine discount bonds due 2033 were lower by 1.15 points and were quoted at 88.1 bid.

Asia stumbles, doesn't fall

"We're trading weaker in line with the close in equities," a trader said, but "not as badly battered compared to what's going on over there."

"We're pushing out toward the wides of January in the indices, in benchmark CDS and what-have-you, but we haven't broken through," he said.

"The cash markets have been very well-behaved," he added.

In Indonesia, investment in mining will likely be restrained as the House of Representatives considers a new mining bill.

Investments this year were expected to grow by 2.5% to $1.38 billion from $1.35 billion, according to the Jakarta Post.

The Indonesian bonds due 2018 were quoted unchanged at 104.25 bid, 104.75 offered.

Pakistan's government bonds due 2017 were lower by 1 point at 86 bid, 88 offered.

The government of India announced that it will forgive $15 billion of small farmer's debt under the new budget plan.

The populist budget also includes price controls on food and consumer goods aimed at easing inflation pressure.

The rupee was seen trading at 40.022 to the dollar.

Inflation, corruption charges in Philippines

In the Philippines, consumer costs were likely driven up by higher commodity prices, the central bank said, according to the Manila Times.

The bank said inflation figures in February may fall between 4.8% and 5.5%, up from 4.9% in January.

The peso was seen trading at 61.259 to the dollar.

Also, a crowd of thousands calling for the resignation of president Gloria Arroyo gathered in Manila on Friday.

Arroyo and her husband have been suspected of receiving kickbacks from a Chinese contractor and other graft.

Former presidents Joseph Estrada and Corazon Aquino were among the protestors.

The Philippine bonds due 2030 were up 0.25 point to 129.75 bid, 130.25 offered.

Emerging Europe slips

As U.S. equities tumbled and Treasuries soared, emerging Europe was tugged lower, but "not entirely across the whole spectrum," a trader said.

"In corporate Russia things are fine," he said, "Some bonds are higher."

"There's been some buying of Vimpelcom," he said.

In Russia, the sovereigns also traded higher on the last day of trading before Sunday's presidential elections.

Outgoing president Vladimir Putin encouraged Russians to vote during a televised address, but most assume Putin's chosen successor Dmitry Medvedev will easily win the presidency.

Putin has stated he is ready to serve as prime minister if Medvedev is elected.

The Russian government bonds due 2030 were seen better by 0.6 point at 114.5 bid, 114.55 offered.

In Turkey, the minister of economy, Mehmet Simsek, said the government must take steps to eliminate the country's black market, according to the Turkish Daily News.

Simsek called the unregistered economy a roadblock in front of productivity, competition and innovation, the report said.

Also, the Turkish army is pulling out of Iraq after its actions against Kurdistan Worker's Party (PKK) rebels.

The Turkish sovereigns due 2030 gained 0.3 point and were spotted at 151.45 bid, 151.55 offered.

The new sovereigns due in 2038 fell 0.625 point to 95.75 bid, 96 offered.

"It struggled from the off really," a trader said about the $1 billion 7¼% issue from Turkey.

"The market's heavy," he added.

Primary hobbled

The primary market remained silent after the unfavorable reaction to Turkey's new offer.

Although according to rumors, "There is stuff going through in the loan market," a trader said.

Plus, "there's private stuff going on," he said.

Still, he described the overall condition of the pipeline as "very difficult."

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