Emerging markets end mixed; LatAm suffers with U.S. economy; Asia holds relative strength

By Aaron Hochman-Zimmerman

New York, Feb. 3 - Emerging markets came in mixed on Tuesday as equities clawed higher on mildly encouraging headlines.

As a sector, Latin America was not impressed by the session on Wall Street as Mexico led the losers in the category.

Asia was once again the outperformer in emerging markets with the Philippines in front of a largely positive day.

After a recent flurry of activity, the primary market has again been pushed into the background as those closest to the Indonesia roadshow have been reluctant to divulge any details.

Volumes were healthy in Asia, but on average, the market was content to watch the action in Washington, D.C., before making any strategic moves.

From the major markets, volatility dropped early but stabilized and resumed its fall in the afternoon as it ended lower by 2.46 at 43.06, according to the VIX index. The index is a common measure of market volatility.

Treasuries reversed course and fell on Tuesday as emerging markets were able to narrow by 18 basis points to a spread of 633 bps, according to the JPMorgan EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging market debt.

LatAm on backward slide

Latin America continued to feel the pressure from the suffering U.S. economy on Tuesday even as U.S. equities finished higher.

Brazil has "been eroding for the course of the last couple of weeks," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The government has posted economic numbers that have run the range from "bad to exceptionally bad," he said.

After weak numbers in November and December, things have "fallen off a cliff," he said, but the fall was largely driven by the currency and equities while the debt market usually outperformed.

The 7 1/8% Brazilian bonds due 2037 slipped 0.6 point to 101.5 bid, 101.9 offered.

In Venezuela, investors have been getting "more nervous" about the outcome of a referendum, which may clear the way to leave president Hugo Chavez in office for another 12 years, Alvarez said.

The skittishness has been "slowly seeping into debt prices," he said.

Also in the corporate sector, the state oil firm PDVSA has been accused of being in arrears on operating contracts with two service providers, Alvarez said.

The 9¼% Venezuelan government bonds due 2027 added 1 point to 50.75 bid, 52 offered.

Elsewhere in the category, Argentina's 8.28% Argentine discount bonds due 2033 were lower by 0.75 point to 33.25 bid, 35.5 offered.

Mexico faces U.S. pressure

Mexico was one of the harder hit credits on Tuesday.

The country has been facing increasing pressure from the negative picture in the major markets.

The central bank's outlook for negative GDP growth between a contraction of 0.8% and 1.8% has begun to sway investors to turn away from Mexico.

Even the local market action has "a lot to do with what the exchange rate is doing," Alvarez said.

Locals have been "seeking refuge in the dollar," he said.

The peso was seen trading at 14.577 to the dollar.

The 6¾% Mexican bonds due 2034 lost 1.5 points to 90.5 bid, 92 offered.

Asia leads winners

Asia outlasted the other categories and improved along with the slight lift in U.S. equities, a trader said.

"Things are a bit better today," he said after New York's close.

"We're seeing some better buyers appear," he said, as cash levels improved by an average of 0.25 point and spreads tightened around 10 bps.

"Flows were pretty much balanced."

Still, for "the next leg of this," credit will take more of its cues from equities rather than remain an outperformer, he said.

In trading, the Philippines performed well by adding 1.25 point to its government bonds due 2030.

The bonds were seen trading at 113.75.

In Indonesia, exports fell by 20% in December compared to December of 2007 and by 10% compared to November's figures, the Jakarta Post reported.

Since the end of November, non-oil and gas exports to Japan dropped by $100 million, while exports to the United States fell by $28 million.

The Indonesian bonds due 2018 were quoted at 78 bid, 80 offered.

In Pakistan, where traders have recently seen more interest, the bonds due 2017 were quoted at 38 bid, 42 offered.

Elsewhere, the Philippines' Asian Development Bank treasurer Mikio Kashiwagi thanked investors for their participation in Monday's $1 billion offering.

"We are very satisfied with the transaction and the swift book-building process, particularly amidst a challenging market backdrop," he said in a statement.

"There was healthy demand from high-quality investors, resulting in an oversubscribed book close to $1.2 billion," he continued.

Nearly 47% of the bonds were sold in the European time zone, 36% were sold in Asia and 17% were sold to investors in the Americas.

Around 58% were bought by central banks and financial institutions, 24% were bought by funds, asset managers and insurance companies and 18% were bought by banks.

ADB still expects to put $9 billion to $10 billion of debt in the market in 2009.

Emerging Europe snowed in

Emerging Europe continued to grind along slowly.

Traders in London were still busy digging out of the snow and waiting to see where the U.S. Congress would go with its stimulus package debate.

In Russia, GDP growth sank to 5.6% in 2008, compared to 8.1% in 2007, the government reported.

The Russian economy has suffered since the July highs of oil prices gave way to a drop, which put oil below $40 per barrel in recent weeks.

Still, for trading on Tuesday, "it hasn't done anything," a trader said. "Russia is pretty sturdy today ... better than yesterday."

On Tuesday, light sweet crude was seen trading at $40 per barrel.

The Russian government bonds due 2030 added 0.5 point to 92.25 bid, 92.5 offered.

In Turkey, wrangling with the International Monetary Fund continued as disagreements over the use of the proposed $25 billion loan may put the talks in hiatus.

Economy minister Mehmet Simsek argued that the IMF's spending cuts and debt raising strategy does not acknowledge Turkey's ability to tap local markets, the Hurriyet Daily News reported.

"Turkey does not have any problems regarding public sector borrowing," Simsek said, according to reports.

The IMF representatives will return to Turkey at the end of February, but "if they insist on keeping the same approach toward the issues then we may start direct talks a bit late," he said.

The Turkish sovereign bonds due 2030 were unchanged at 141 bid, 142 offered.

Also in emerging Europe, Ukraine's bonds due 2016 were quoted at 44 bid, 46 offered.

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