Emerging markets hold flat; LatAm watches FARC conflict; emerging Europe eyes oil flows

By Aaron Hochman-Zimmerman

New York, March 4 - Emerging markets offered a calm day of trading, but political fights were in high gear in Latin America and emerging Europe.

On the equity side, stocks were lower on the comments offered by Federal Reserve chairman Ben Bernanke, who encouraged banks to do more of the same to mitigate the mortgage crisis, a market source said.

However, stocks posted a modest rally as rumors of progress for the monolines hit the market, he said.

"As long as bank balance sheets remain under pressure, lending is going to remain curtailed," an emerging markets strategist said, adding that emerging markets is still strongly governed by external factors.

"It's outperforming, but technicals remain pretty negative," he said.

"We're not out of the woods yet," he said.

Volatility gained throughout most of the day but ended lower by 0.76 at 25.52 on a late equity recovery, according to the VIX index. The index is a frequently used yardstick of market volatility.

Treasuries backed off as emerging markets was able to tighten by 10 basis points to a spread of 284 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 10 bps with a spread of 307 bps.

The diversified index has a less strict liquidity rule for inclusion.

Emerging Europe flat as gas fight flares

Prices in emerging Europe moved little on cool volumes on Tuesday, but investors' attention was drawn to the flames building over the continent's gas supply.

In Russia, after the state-run gas firm OAO Gazprom cut supplies to Ukraine by 25%, another 25% was cut as payment was not received.

The Ukrainian first deputy prime minister Alexander Turchinov accused Gazprom of withholding fees owed to Kiev for transporting gas, reported the Itar-Tass News Agency.

Kiev has often been accused by Gazprom of not paying for the gas it receives.

Russia has promised that the crisis would not affect supplies to Western Europe, but the Ukraine said it may siphon off from the West if Russia proceeds with another reduction.

The European Union promised to coordinate its response with all of the involved governments.

The Russian sovereigns due 2030 were quoted flat at 114.65 bid, 114.95 offered.

"Russia has all the cards in this particular case," a strategist said.

Also in Ukraine, the parliament held no session on Tuesday as the opposition held up business over the country's steps toward joining NATO.

Leader of the opposition, and the Party of Regions, Viktor Yanukovich, said protests would follow if his demands were not satisfied, reported Itar-Tass.

The Ukrainian government bonds due 2016 were better by 0.4 point at 99.25 bid.

Elsewhere in Turkey, the stock exchange has shown little reaction to domestic concerns because 72% is held by foreigners, the Turkish Daily News reported.

The market failed to show any response to the brief invasion of Iraq, the report said.

The Turkish sovereign bonds due 2030 slipped 0.3 point to 151 bid, 152.75 offered.

FARC conflict continues

With combat troops from Ecuador and Venezuela at Colombia's border, the conflict became more a war of words on Tuesday.

Colombia accused Venezuela of contributing $300 million to the Colombian revolutionary group, the FARC. The information was based on a laptop recovered from Raul Reyes, the rebel leader killed by the Colombian army on Saturday.

Colombia president Alvaro Uribe also asked the International Criminal Court in The Hague to bring charges against president Hugo Chavez of Venezuela for supporting the FARC, which Colombia considers a terrorist group.

The computer recovered from Reyes also contained instructions for making a dirty bomb.

For his part, Chavez accused Uribe of pushing the region into war by conducting Saturday's raid just inside the border of Ecuador.

"This is something that's been going on for a very long time," a syndicate desk official said.

"I don't think anybody thinks this is going to go anywhere," he said about his doubts over a major escalation.

"Venezuela still needs food from Colombia," a strategist said.

"I don't make much of it," he said.

The 9¼% Venezuelan bonds due 2027 gained 0.5 point to 97.1 bid.

The 7 3/8% Colombian bonds due 2017 gained 0.15 point to 109.4 bid.

The 8% Ecuadorian bonds due 2030 lost 0.9 point to 96 bid, 96.75 offered.

Quiet LatAm ends flat

Low volumes and high volatility kept the risk-takers away from the table in Latin America during Tuesday's session.

Even the conflict over the FARC did little to change prices in Latin America.

Argentina president Cristina Kirchner offered her first annual address to the legislature on Saturday, but reactions have been mixed, according to the Buenos Aires Herald.

Many have called the speech hopeful, while others doubt the credibility of her statistics and expect her promises will be empty.

The 8.28% Argentine discount bonds due 2033 were better by 0.5 point to 88.65 bid.

Brazil's 11% bonds due 2040 were up 0.1 point to 134.35 bid.

Asia flat, but cautious

Prices in Asia were flat to slightly better on another quiet day of trading.

Still, "we continue to see very poor news," a trader said, adding: "The lows get lower and the highs get lower."

"It feels like the market is very sick here," he said, but warned investors not to ignore the short-term rallies.

In Indonesia, 14 commercial banks agreed to support small- and medium-sized businesses obtain financing through rural and regional banks, the Jakarta Post reported.

The 14 major banks expect to lend 1.6 trillion rupiah to the smaller banks.

Also, the Industrial and Commercial Bank of China and the China Construction Bank plan to buy Singapore's Tamasek Holding's shares of Bank Internasional Indonesia.

Bank Indonesia is reviewing the proposed deal.

The Indonesian sovereigns due 2018 added 0.125 point to 104.625 bid.

Pakistan's bonds due 2017 "were a little bit better today," a trader said on Tuesday.

The issue was quoted up 1 point at 87 bid.

India's state railroad network is expecting to receive an infusion of $56 billion over the next five years. The investment program comes from India's new budget, the BBC reported.

Also, China plans to increase its military budget by 18% in 2008 to $59 billion.

Meanwhile, China issued warnings to Taiwan as it prepares to hold a referendum to determine whether or not to apply to the United Nations with the name Taiwan.

China considers the referendum a vote for the independence of one of its provinces.

Dollar strength may damage peso

In the Philippines, the central bank said a turnaround in the dollar could make business planning difficult, the Manila Times reported.

A rebounding dollar could drastically change the inflation outlook.

In the past, the bank has only taken action to smooth patches of volatility rather than make major action against inflation.

The strength of the peso has helped stave off inflation pressures from rising commodity prices.

The peso was seen trading at 40.5 to the dollar.

The Philippine sovereigns due 2030 dipped just 0.125 point to 130.125 bid.

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