Emerging markets socked again; Asia outperforms; Argentina's discount bonds plunge; primary 'dead'

By Aaron Hochman-Zimmerman

New York, Sept. 17 - Emerging markets were not strong enough on Wednesday to fight off the dark cloud the major markets have put over the developing credits.

The pattern for the week remained in tact as the emerging world had little to say about its own near-term destiny. Latin American credits fell the farthest, followed by emerging Europe and Asia tumbling after.

In trading, spreads were thrown out to record levels while Argentina's benchmark discount bonds due 2033 plunged to the year's low at 57.5 bid.

In the primary, there was no change since Tuesday. "Dead, just dead," a syndicate official said.

After equities had another daylong train wreck, volatility added 4.68 to 36.22, according to the VIX index. The index is a common measure of market volatility.

Treasuries took emerging markets for another ride, pulling spreads wider by 12 basis points to 428 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging markets debt.

No sunny side for LatAm

In Latin American trading, "there haven't been any bright spots today; that's for sure," a strategist said.

"Risk aversion remains the main thing," he said.

There were a "significant amount" of flows, he said, but all at very discounted levels as liquidity washes out of the market.

There are also "some redemptions taking place out there," he said.

In Venezuela, the military is believed to have expressed interest in Russia's Su-35 Flanker, an advanced fourth-plus generation air superiority fighter.

"In 2009, Russia will complete trials of its Su-35 fighter, and in 2010, it will begin to batch-produce them," said Sergei Chemezov of the state-run defense contractor Rostekhnologii Corp., according to the Itar-Tass News Agency.

The 9¼% Venezuelan government bonds due 2027 shed 1.1 points to 71.5 bid, 72.5 offered.

Fellow high-beta credit Argentina was beaten as its 8.28% discount bonds due 2033 lost another 1.5 points to 57.5 bid, 58.5 offered.

In Brazil, the highly traded 11% bonds due 2040 gave up 1.7 points to 123.3 bid, 123.75 offered.

Meanwhile, corporate issuer Telemar Norte Leste SA "must be furious," a syndicate official said.

On Sept. 10 the telecom had pulled a two-tranche $1.5 billion to $2 billion deal, which was talked in the 7¾% area and in the 8½% area, respectively, for the five- and 10-year notes.

"The primary is dead," the official said.

Elsewhere, investment-grade Mexico only lost 0.25 point from its 5 5/8% sovereigns due 2017. The bonds were spotted at 97.75 bid.

It's anyone's guess when and how the market recovers, the official said, although "it's gonna be tough," he said with confidence.

Asia 'outperforming'

Meanwhile, Asia was hurt again on Wednesday, but still not at the magnitude that Latin America has suffered, a trader said.

"It's been weak, but it's definitely outperforming," he said.

In the Philippines, the country's financial system was busy with its own damage control in order to prevent the spread of the major market contagion, according to the Manila Times.

Metropolitan Bank and Trust Co. earmarked $14 million to deal with a $20.4 million exposure to Lehman Brothers.

Banco De Oro Unibank Inc. set aside PHP 3.8 billion to put out Lehman-related fires.

"The exposure to Lehman of some Philippine banks is small relative to their capital and this is spread out among several banks," said central bank governor Amando Tetangco.

"Our banks are benefiting from the banking reforms made, particularly the increase in their capital, which is meant precisely to improve capacity to absorb shocks like this one, as well as better risk management," he said.

The Philippine sovereign bonds due 2030 managed to add 0.5 point to 127.5 bid.

In Indonesia, the government-run utility PT Perusahaan Listrik Negara announced plans to build a $500 million pipeline terminal to ensure a steady supply to its power plants, the Jakarta Post reported.

The project will be jointly managed by the state oil and gas firm PT Pertamina and is expected to be completed by 2013.

The Indonesian government bonds due 2017 held unchanged at 97 bid, 98 offered.

In Pakistan, the top-ranking American military officer, admiral Mike Mullen, met with Pakistani prime minister Yousuf Raza Gilani and the top-ranking Pakistani officer general Ashfaq Kayani to ease tensions between the two countries.

Confrontations between the two at the Afghan-Pakistan border have been nonviolent, but Pakistani troops used warning shots to prevent American forces from crossing the border.

American troops have been given clearance from Washington D.C. to cross the border in pursuit of militants, but Pakistan has not given its permission for the cross-border raids.

Emerging Europe sees more selling

Emerging Europe was busy with high volume at low prices as investors spent Wednesday watching the financial meltdown and selling.

On the political side in Russia, president Dmitry Medvedev met with the leaders of Georgia's separatist republics of Abkhazia and South Ossetia in order to sign friendship accords in the Kremlin.

On Aug. 26 Russia recognized the independence of the two regions, but only Nicaragua has joined it by accepting the two as independent nations.

Medvedev said the treaties include measures to allow for joint military operations to preserve peace and stability for the two breakaways.

The Russian sovereign bonds due 2030 fell 2 points to 101 bid.

In Turkey, investors remain hesitant to put new money to work in the country despite the recent victory for the AK Party in constitutional court, the Turkish Daily News reported.

The Barometer survey noted that 62% of foreign investors are worried that political instability is rising and that 55% of investors were pessimistic about the economic outlook over the next six months, the report said.

In 2007, foreign direct investment hit $22 billion but is only expected to reach $15 billion in 2008.

The Turkish government bonds due 2030 mounted a slight comeback by adding 1.45 points to 142 bid, 142.5 bid.

Also in the emerging European time zone, Israel's ruling Kadima party voted to replace prime minister Ehud Olmert with foreign minister Tzipi Livni.

Olmert, who has been marginalized by accusations of corruption, will step down and offer Livni his full support, he said.

Ukraine tries to patch coalition

Further political battle was waged in Ukraine, as politicians were engaged in intense negotiations to rebuild a coalition in the legislature in order to prevent new elections.

The nationalist Party of Regions and the Vladimir Litvin bloc were believed to be in talks with the Western leaning Yulia Timoshenko bloc.

Party of Regions leader and former Timoshenko rival Viktor Yanukovich hoped to secure the speaker's position in the rada, but the Timoshenko bloc was not prepared to make promises, reports said.

President Viktor Yushchenko opposes the unlikely partnership between Yanukovich and Timoshenko but does not expect it to last.

"Such an alliance looks unnatural to voters," he said, according to the Itar-Tass News Agency.

While backroom negotiations took place, party leaders on all sides met with voters in their respective regions to rally support.

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