Emerging markets firmer; Latin America sovereign bonds lower; Ecuador credits buried; Primary quiet

By Aaron Hochman-Zimmerman

New York, July 8 - Emerging markets largely took on a better tone on Tuesday in emerging Europe and Asia, but Latin America was dragged under by a battered Ecuador.

Ecuador's business-minded finance minister, Fausto Ortiz, resigned in protest over a series of nationalizations ordered by president Rafael Correa.

The arrival of Ortiz's socialist-leaning replacement, Wilma Salgado, hacked Ecuador's benchmark bonds due 2030 for 4 points.

The positive day for U.S. markets was not able to help in Latin America, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"The risk aversion trade has not been there," he said, "The market wants to wait and see here."

The other sectors, although mildly positive, saw light action.

"Prices are better," but "we have not seen buying interest" at these levels, a strategist said.

Meanwhile, the primary market continued to wait out the volatility, although a strong day for equities sank volatility figures. The VIX index dropped by 2.63 to 23.15. The index is a frequently used gauge of market volatility.

As a sector, emerging markets widened by 3 basis points to a spread of 307 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging markets debt.

Ecuador leads high-betas lower

Latin American trading saw big action in the high-beta credits, particularly in Ecuador, where the resignation of finance minister Ortiz sent the country's credits reeling.

Elsewhere, a "commodities rout" put some pressure on oil producer Venezuela, but a small amount by comparison to Ecuador, which was "by far the largest underperformer," IDEAglobal's Alvarez said.

Light sweet crude was seen trading lower by $5 per barrel near $135 per barrel.

Venezuela's 9¼% government bonds due 2027 fell 1 point to 94 bid.

In Argentina, policemen were injured as they attempted to break up protests by leftwing groups protesting actions by both the government and the striking farmers, the Buenos Aires Herald reported.

"[Investors] may be just tying into the overall risk equation in Latin America," Alvarez said about Argentina.

The 8.28% Argentine discount bonds due 2033 fell 1.5 points to 74.5 bid.

Meanwhile, in typically stable Brazil, the 7 1/8% bonds due 2037 lost just 0.1 point to 109.75 bid, 110.25 offered.

Ortiz out, Ecuador pounded

"Ecuador is in the midst of everything," Alvarez said.

Finance minister Ortiz resigned in protest after president Rafael Correa ordered media outlets and a host of other businesses seized by the government.

Correa intends to use the money from the auction of the nationalized companies to cover debt defaulted upon by the Isaias family, which is now largely in exile in the United States.

Ortiz was seen as a very business-friendly minister in the Correa government, but his successor, Wilma Salgado, is expected to "try to boost social positions over the payment of debt," Alvarez said.

"So that is a negative" for the financial world, he said.

The news has "really shaken the market out of the longs" in Ecuador, he said as the credit unraveled by 51 bps.

Another market source feels the drop in Ecuador is a buying opportunity.

Correa is not interested in holding what was seized and was only interested in paying debt, the source said.

Still, the placement of Salgado at the head of the finance ministry is not encouraging, the source said.

The 8% Ecuadorian sovereigns due 2030 sank 4 points to 93 bid.

Emerging Europe mixed to higher

Emerging Europe was unchanged to slightly better after a strong day on Monday.

In Russia, the gas monopoly OAO Gazprom said gas it purchases from central Asian countries will double in price in 2009, the RIA Novosti News Service reported.

Gazprom said that would mean higher prices for its customers in Europe.

Under the current agreement, Gazprom bought gas from Turkmenistan at $130 per 1,000 cubic meters and now pays $150 per cubic meter in the second half of the year.

In 2009, the price will be determined by the market, but in subsequent years until 2028, the price will be set by a long-term contract.

The Russian government bonds due 2030 were quoted at 112.25 bid, 112.5 offered.

Meanwhile in Georgia, the BBC reported that the province of Abkhazia will cut all of its connections to the Georgian government; however, the story attributed to the Russian government's Interfax News Agency faded.

Still, tensions are high in the region where five bombings in the last week in the province have been considered by some to be directed by the Tbilisi government.

Elsewhere in Turkey, by considering account activity in free trade zones, the central bank cut its account deficit to 5.6% from 5.7% of the GNP or $711 million, according to the Turkish Daily News.

The Turkish sovereign bonds due 2030 were seen at 141 bid, 141.5 offered.

Also in emerging Europe, Slovakia's koruna will be exchanged at the rate of 30.126 for the euro when it will become the eastern European country's official currency on Jan. 1, 2009.

Many in the European Central Bank had concerns over the koruna's inflation rate, but the European Union's finance ministers still allowed the currency's entrance.

The koruna was seen trading at 19.272 to the dollar.

Asia firms

Asian trading saw issues tighten as investors took advantage of a positive tone in the United States.

In the Philippines, the central bank said a tax relief program is unlikely to cause further increases in consumer prices, according to the Manila Times.

However, soaring fuel prices managed to chop June auto sales by 1.2%.

Still, through June yearly sales are up 13.6% compared to the same period of 2007, the report said, putting auto sales very close to their yearly goal.

The peso was seen trading at 45.59 to the dollar.

Meanwhile at the Developing-8 summit in Kuala Lumpur, leaders of Malaysia and Indonesia called for greater food production and a program to lower oil prices, the Jakarta Post reported.

"Long-term solutions must be found for stabilizing the price of oil. For example, the international community can examine how the futures market might be organized to assist in stabilizing prices," said Malaysian prime minister Abdullah Ahman at the summit of eight developing Muslim nations including Pakistan, Iran, Bangladesh, Egypt, Nigeria and Turkey.

Malaysia was forced to raise gasoline prices by 41% and diesel fuel by 63% in June, the report said.

Indonesia has also cut subsidies and has pledged to leave OPEC as it has become a net importer of oil.

Meanwhile in Asia, Thailand's former prime minister, Thaksin Shinawatra, along with his wife, began a corruption trial on Tuesday.

Thaksin has lived in exile for most of the time since he was deposed in a coup in 2006.

Also, a senior member of the ruling People Power Party and former house speaker Yongyut Tiyapairat was banned from politics for five years after being convicted of improper election practices.

Some feel his conviction will damage his party's already fragile coalition.

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