Emerging markets sink; Nationalization fears hurt Ecuador's bonds; Primary market dormant again

By Aaron Hochman-Zimmerman

New York, July 15 - Emerging markets were dragged under by another day of volatile winds blowing in from the major markets.

The bad news began in the morning with a 1.8% increase in producer price index for finished goods in June, according to the U.S. Bureau of Labor Statistics.

Federal Reserve chairman Ben Bernanke then offered up testimony to Congress about an economy that is still mired in trouble from the mortgage market.

"Economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated," Bernanke said.

Later a brief recovery was mounted as oil took a historic drop, but even those gains were short lived.

"It's a straight equity trade again," a trader said as emerging market credit was tightly tethered to U.S. equities.

Ecuador stood out as major underperformer in trading, but also as a credit that found its own way to lose.

Investors nervous about a new round of nationalizations sparked selling that trimmed 2 points from the bonds due 2015.

Late in the day a small bounce may have come from the rumor of a possible acquisition of the United States' Sprint Nextel by South Korea's SK Telecom.

In general, the volatility has obliged many investors to pull risk off the table.

"It's very, very short term," the trader said about the market's lack of constancy.

Equities bounced around on Tuesday, which left volatility higher by just 0.06 at 28.54, according to the VIX index. The index is a common measure of market volatility.

The difficult equity market sent investors on a flight to safety, which dropped Treasury yields and left emerging markets wider by 2 basis points at a spread of 309 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to keep assets in emerging markets debt.

High-betas lose in LatAm

"It's been up and down all day," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The high-betas were out in front of the losers, but many of the more stable credits were able to firm up, he said.

In Argentina, the country waited on the next round of demonstrations on both sides of the export tax issue.

The demonstrations are designed to influence the vote on the tax bill, which scheduled to take place in the upper house of the legislature on Wednesday.

"Argentina is still lagging, but that's normal," Alvarez said.

The 8.28% Argentine discount bonds were up 0.45 point to 72.25 bid, 73 offered, but the benchmark discounts were the outperformers in Argentine credit.

Also in Latin America, Venezuela was an underperformer on Tuesday as oil sank to below $136 per barrel.

On the whole, Venezuelan credit may be underpriced, another market source said.

Especially this close to an election, the government will tread lightly with any debt sales and will not allow bank failures, the source said.

The 9¼% Venezuelan sovereigns due 2027 dropped 0.75 point to 91 bid, 91.75 offered.

Meanwhile in Brazil, energy shortages are catching up with consumer prices and driving inflation, the source said.

The inflation problem has been a key concern for the Brazilian economy and will likely begin to weigh on total investment figures heading into next year, the source said.

The real was seen trading at 1.593 to the dollar.

The bonds saw "a small bounce," Alvarez said, as the 7 1/8% Brazilian government bonds due 2037 were better by 0.4 point to 109.7 bid, 110 offered.

Correa goes shopping?

After a shopping spree of nationalizations of media companies and a change of command in the finance ministry, many investors came back to Ecuador under the assumption that president Rafael Correa's anti-business actions were limited and "more bark than bite," Alvarez said.

However, the bonds were again digging their way lower on Tuesday as Correa "may look to confiscate and essentially force out Petrobras" and other oil interests, he said.

After many rounds of investors waffling on Correa, people are beginning to walk away from Ecuador in greater numbers, Alvarez said.

The 8% Ecuadorian bonds due 2030 fell 0.25 point to 89.75 bid, 91.5 offered.

The 9 3/8% Ecuadorian bonds due 2015 fell 2 points to 96.5 bid, 97.5 offered.

Asia climbs, slides

Asian trading rode the rollercoaster on Tuesday as a weak morning was overtaken by a stronger midday, which "is failing a bit here now," a trader said at the end of the trading session.

"The market is so nervous and edgy," he said.

Throughout the day "tone was much firmer," he said, as "tone was much firmer, 5 [bps] to 7 [bps] off the wides, but we're failing fairly quickly."

In the Philippines, overseas workers brought $1.4 billion into the economy in May, an increase of 15.6%, according to a release from the central bank.

A total of $6.8 billion has entered the economy through remittances during the first five months of 2008, 14.7% higher than the same period of 2007.

The greatest amount of remittances came from workers in the United States, Saudi Arabia and Canada.

The Philippine sovereign bonds due 2030 lost 1.25 points to 122.25 bid, 123 offered.

Meanwhile in Indonesia, realized investments were up 56.2% to $11.3 billion in the first half compared to the first half of 2007, the Investment Coordinating Board said, according to the Jakarta Post.

Foreign investment spiked by 153.2% to $10.3 billion as domestic investments fell sharply, the report said.

Increasing fuel and commodity prices were blamed for the drop in domestic investment.

As the power crisis spreads, the government will begin to enforce a new regulation on July 21 requiring factories to schedule working hours around high demand times on the nation's power grids.

Officials believe foreign investors will not be put off by the energy shortage as the United States, China and Vietnam are also dealing with similar concerns, the report said.

The rupiah was seen weaker, trading at 9,140.00 to the dollar.

The Indonesian government bonds due 2017 lost 0.375 point to 97 bid, 97.75 offered.

Also in Asia, Pakistan's bonds due 2017 dropped to 69 bid, 74 offered.

"They just keep getting hit," the trader said.

Emerging Europe slides

Emerging Europe traded slightly wider in the early hours but were subject to further selling brought on by a weak U.S. open later in the day.

The tone, which was initially weak, also deteriorated further into the afternoon with U.S. wholesale inflation and the sobering testimony to Congress from Fed chairman Bernanke, a market source said.

In Russia, president Dmitry Medvedev said he would like to build a stronger relationship with NATO as he signed a foreign policy directorate on Tuesday.

Still, he voiced his objections to NATO's planned expansion to Russia's borders by considering Georgia and Ukraine.

Turkey indicts coup suspects

In Turkey, the political climate is becoming more unstable, a market source said, as government prosecutors filed more than 80 indictments against suspected coup plotters.

Still, many feel that the AK Party is carrying on the case against the Ergenekon group for political reasons relating to the case against the AKP in the constitutional court.

"The government didn't interfere with the process. It can't direct the investigation and has no right to do so. The judiciary is independent. Those who claim otherwise tend to pervert the issue," said Bekir Bozdag, the AKP parliamentary group deputy leader, according to the Turkish Daily News.

The opposition insisted that the government used the media to improperly influence the case.

"Some [powers] in the country presented information [to the press] with regard to the Ergenekon case and manipulated the investigation process. They imposed a kind of pressure," said Hakki Suha Okay, the Republican People's Party (CHP) deputy parliamentary group leader.

"Even the prosecutor himself accepts the situation about the leak of information and that a major part of the indictment took place through the media ..."

The environment is discouraging optimism over Turkey's credits, at least in the near term, the source said.

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