Emerging markets step higher; Mexico credit leads LatAm names higher; currency pains ease

By Aaron Hochman-Zimmerman

New York, Feb. 6 - Emerging markets recovered along with an equity rally on Friday, which ignored another helping of poor employment news in the United States.

Investors were buying as they shored up positions ahead of a highly anticipated speech by new treasury secretary Tim Geithner.

The buying served to warm up the market to equities and put a chill on Treasuries, which sank the U.S. bonds and reeled in emerging market yields.

Despite the improved spreads in the emerging markets, the larger picture of higher yields on the U.S. side was disconcerting to many with positions in the developing economies.

Still, trading was improved on Friday, with Mexico leading a resurgence of suffering Latin American credits.

The bonds due 2019 added 1.5 points.

On the primary side, the market heard a slight bit of reassurance that a deal is, in fact, on the way from Indonesia, but no Earth-moving events changed the landscape on Friday.

Equities' strong showing was not enough to put a major dent in volatility as it waffled throughout the session and ended lower by just 0.36 at 43.37, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector emerging markets wound tighter by 20 basis points to a spread of 625 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will accept to hold assets in emerging market debt.

"That's because you've got a little bit of upside in the bonds and a lot of downside in the Treasuries," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

LatAm 'pretty positive'

Latin America was "looking pretty positive" on Friday, Alvarez said, or at least, "better than yesterday."

The category saw a bit of "bouncing" after a treacherous week.

Mexico looked stronger after three days of intervention by the central bank on behalf of the peso, he said.

"They've got plenty of ammunition to spend in that sense," he said, but investors may start to "line up at the central bank."

The central bankers are "inviting the specs in to test your will" and "there is no bull [market] story on the fundamentals," he said.

In Brazil, the currency has demonstrated it can bounced between a weaker and stronger range, but Mexico will now test new limits on the weak side, he said.

The peso was seen trading at 14.1965 to the dollar.

The Mexican 8 1/8% bonds due 2019 were seen better by 1.5 points at 97 bid, 97.4 offered.

The real was seen trading at 2.263 to the dollar.

The 7 1/8% Brazilian sovereigns due 2037 tacked on 0.75 point to 99.5 bid, 100.5 offered.

In Venezuela, where elections loom on Feb. 15, "the stress here is if [president Hugo] Chavez wins, you're very likely going to see more weakness," Alvarez said.

"The oil story, for the time being, is dead," and the national oil firm PDVSA has left its accounts with major oil rigs in arrears, he said.

Still, with equity strength, the 9¼% Venezuelan bonds due 2027 were stronger by 1 point at 51.75 bid, 52.25 offered.

Fellow high-beta, Argentina was seen slightly healthier as its 8.28% discount bonds due 2033 added 0.25 point to 33.25 bid, 34.25 offered.

Emerging Europe walks tighter

Emerging European spreads tightened with Treasury help on Friday.

In Russia, prime minister Vladimir Putin met with European Commission president Jose Manuel Barroso to discuss energy policy, reports said.

During the talks, Barroso reiterated the European Union's support for Russia's entrance into the World Trade Organization.

Also, at the meeting, Putin asked that Ukraine's gas line supervisors "continue monitoring until at least the end of the first quarter of this year," he said, according to the RIA Novosti News Agency.

"It is important now to create conditions for this kind of crisis not to happen again. We believe energy security is a very important sphere of interest for Russia and the European Union," he said.

The crisis cost the Russian oil giant OAO Gazprom more than $1.2 billion, the report said.

Meanwhile in Turkey, the government intends to place its support behind the proposed Nabucco pipeline regardless of the state of its E.U. accession.

The pipeline is expected to carry 30 billion cubic meters from Central Asia through Turkey to Austria, the Hurriyet Daily News reported.

Light sweet crude was seen trading as low as $39 per barrel.

Asia stable at week's end

Asia remained calm for the last trading day of the week as a positive tone permeated from the major markets.

In the Philippines, the gross international reserves hit $39.6 billion by the end of January, the central bank reported in a statement.

The figure beats the January 2008 number by $2 billion.

"The marked increase in reserves was due mainly to deposits by the National Government of proceeds from its 10-year bond issue, and by the Power Sector Assets and Liabilities Management Corporation of proceeds from the privatization of the National Transmission Corporation, as well as inflows arising from the [central bank's] net foreign exchange operations and income from its investments abroad," the statement continued.

In Indonesia, reports said the government's new issue is still on track, but officials offered no further details.

The government was forthcoming about some good news it sees in the global economy.

Indonesia's central bank expects the liquidity crunch to ease within six months, said bank governor Boediono.

"We think the critical period will be around six months, with the main problems of tight liquidity and investors retrieving their money to return home," he said, according to the Jakarta Post.

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