Emerging market sells amid bailout talks; Venezuela leads losers; investors watch Washington, D.C.

By Aaron Hochman-Zimmerman

New York, Sept. 26 - Emerging markets investors sold off holdings in order to run from the risk presented by the ongoing negotiations over the U.S. financial bailout package.

After glimmers of hope for a deal on Thursday, more Congressional Republicans expressed their objections to the deal supported by Democrats and the White House.

Even in its hypothetical sense, the proposed deal has done little to consistently support faith in the market, an emerging markets strategist said.

"As a measure to restore confidence, it hasn't worked," he said, "and everybody's talking about watering it down."

The administration has said that the plan's aim is to keep the crisis from deepening, he said, but "we've heard that countless times," referring back as far as the government orchestrated takeover of Bear Stearns by JPMorgan Chase & Co.

In trading, Venezuela was in front of retreating high-beta issues as president Hugo Chavez made investors nervous by discussing nuclear technology with Russia.

The benchmark Venezuelan bonds due 2027 were rocked for 3.25 points.

In the broader market, stocks rallied into the close as volatility jumped by 1.92 to 34.74, according to the VIX index. The index is a frequently used gauge of market volatility.

Despite equity success, Treasuries advanced as emerging markets widened by 3 basis points to a spread of 370 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 3 bps with a spread of 407 bps.

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

LatAm sells ahead of weekend

Latin America saw selling on Friday as lawmakers in the United States were unable to conclude negotiations for a bailout plan.

In Argentina, while at the Council of the Americas during her visit to New York, president Cristina Kirchner defended the administration's statistics reporting agency Indec.

Despite her claims of its accuracy and independence, Indec's history has led investors to believe that the only certainty in the Argentine economy is that the true numbers are not the ones reported.

The 8.28% Argentine discount bonds due 2033 fell 1 point to 63.5 bid, 64.5 offered.

In Brazil, the government announced a plan to end deforestation by 2015.

The proposal contained few specifics, but environment minister Carlos Minc said the plan would focus on eliminating illegal logging and cutting greenhouse gas emissions.

The Brazilian 7 1/8% sovereigns due 2037 dropped 0.7 point to 105.8 bid, 109 offered.

Bonds sink as Chavez visits Russia

Elsewhere, Venezuela's president Hugo Chavez was in Orenburg, Russia, where he met with president Dmitry Medvedev to further economic and military ties between the two countries.

The leaders announced a broad new cooperation between the Russian energy firms and Venezuela's state-run energy company PDVSA, which Chavez called a "colossus."

"This dynamic in our relationship points to the solid foundation of our ties. Our co-operation is multi-faceted ... it includes economic and military ties," Medvedev said, according to the BBC.

Venezuela has already spent $4 billion on Russian military hardware, but Chavez hopes to import nuclear technology from Russia as well.

"It doesn't surprise me," a strategist said about the nuclear rumors.

"Think of how secure they'll be," he joked.

The 9¼% Venezuelan government bonds due 2027 sank 3.25 points to 79 bid, 80.7 offered.

The 7½% Russian sovereigns due 2030 were quoted at 103.25 bid, 103.5 offered.

Emerging Europe slips on low flows

"Bits and pieces have come through," a trader said about emerging European credit on Friday.

"Corporates have traded very poorly" as there is "still an overhang of bonds," he said.

"Russia doesn't trade well," he said on Friday, after Moody's Investors Service released a negative outlook for the country's banks.

The Russian sovereign bonds due 2030 were quoted at 103.25 bid, 103.5 offered.

The emerging European market has also seen some unwinding in the hedging instruments, the trader said, particularly in Turkey.

The Turkish bonds due 2030 were seen at 147 bid, 147.5 offered.

Ukraine struggles to patch coalition

In Ukraine, the government continued to grapple over how to repair or rebuild the ruling coalition after the collapse of the Orange revolution alliance between prime minister Yulia Timoshenko's bloc and the Our Ukraine bloc, which supports president Viktor Yushchenko.

Timoshenko called for early and simultaneous parliamentary and presidential elections in order to give government a fresh start.

"Should both president Viktor Yushchenko and leader of the opposition Viktor Yanukovich force the parliament to hold early elections, in this case I believe it would be logical to hold simultaneously presidential and parliamentary elections, because the logic to overcome the crisis becomes evident, and the society has an opportunity to reformat the whole political scene," Timoshenko said, according to the Itar-Tass News Agency.

Meanwhile, Yushchenko asked that discussions begin with Russia over natural gas supplies.

"The government must make all efforts towards beginning official negotiations, and conducting them openly and purposefully. To this end, directives must be formulated," he said.

Yushchenko pushed for a deal to ensure supplies in 2009.

A recent report was more bullish than the consensus, the trader said; however, "the market is very scared" concerning Ukraine.

The Ukrainian sovereign bonds due 2016 were spotted at 75 bid, 78 offered.

Asia drops into close

Asia was also a victim of nerves as investors were hesitant to hold big positions with the issue of the financial bailout left unsettled.

In the Philippines, the trade deficit soared in the first half of 2008 as the country was forced to deal with soaring commodity prices, according to the national statistics office.

The deficit hit $3.9 billion, compared to $906 million during the first half of 2007.

Electronics still represented the largest portion of the country's exports and accounted for 36.9% of the total exports.

Still, electronics exports declined 5.8% in the first semester to $10.8 billion from $11.5 billion compared to the first semester of 2007.

The Philippine government bonds due 2030 dropped 1.375 points to 125.175 bid, 125.75 offered.

In Indonesia, the government-run Bank Mandiri allowed cement producer PT Semen Bosowa to restructure its $183 million debt.

"We have decided to restructure the debt because Bosowa's cement business is deemed prospective," said Bank Mandiri's managing director for special asset management, Abdul Rachman, according to the Jakarta Post.

The Indonesian sovereign bonds due 2017 managed to add 1 point to 93.5 bid, 94.5 offered.

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