Emerging markets slide with U.S. stocks; spreads wider with Treasury strength; credit outperforms

By Aaron Hochman-Zimmerman

New York, Feb. 10 - Emerging markets were slammed by another round of investors selling the news after U.S. Treasury secretary Tim Geithner rolled out the next phase of the stimulus plan in general terms.

Trading was hurt as equities were squashed, but credit still managed to outperform.

Within the emerging market credits, Asia still held the honors as the top performer in the sector.

Investors there, again, hoped for news of the deal from Indonesia, but in general, hope for new issuance across the category started to fade.

"Now it's difficult," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Before the market can regain a confident stride "you've got to hammer out some details," he said about the stimulus plan.

On Wall Street, volatility built throughout the day and closed higher by 3.03 at 46.67, according to the VIX index. The index is a common measure of market volatility.

As a sector, with a strong move to Treasuries, emerging markets widened by 20 basis points to a spread of 644 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia outperforms again

Asia continued to hold its place on the top of the emerging market pile and "certainly continues to outperform LatAm," a trader said.

Issues "didn't trade very well" after the Geithner speech, but "some of the new issues have held very well," the trader said.

"CDS spreads are a touch wider but not dramatically so," he said.

Korea Development Bank and Export-Import Bank of Korea made new tights, then "faded a little bit" and settled around 575 bps bid, or nearly 100 bps tighter than their reoffer spreads, the trader said.

Still, despite the relative good news, the issue from Indonesia may have to wait a bit longer, he said.

The bonds fell off of their highs and will likely stay slightly off "until there is clarity" about the new bonds.

Also in Indonesia, the central bank took aim at crooks in the banking and finance sector, the Jakarta Post reported.

"There's a lesson learned from recent events in the United States and in Indonesia. Bankers can be smart but integrity plays a greater role," central bank deputy governor Muliaman Hadad said in the report.

Hadad said a tighter "screening" process is being developed along with new "mechanisms" for supervision.

The Indonesian sovereign bonds due 2018 were flat at 80 bid, 82 offered.

Meanwhile in the Philippines, foreign direct investment launched up by 68.1% in November 2008 compared to the November 2007 number.

The month set a record inflow of $232 million, said Nestor Espenilla in a statement from the central bank.

The November figure raised the 11-month total to $1.7 billion, 16.4% higher than the 10-month total.

A $160 million portion of the November inflow came from Hong Kong-based investors who purchased stock in a "local mining company," the statement said.

"The Philippines traded very well," the trader said, as they were 3 points higher than on Feb. 3.

Still, the Philippine government bonds due 2030 were lower on the session by 0.5 point at 114.75 bid, 115.75 offered.

Elsewhere in Asia, Pakistan's bonds due 2017 were quoted at 40 bid, 44 offered.

Morgan Stanley sells HK$1.5 billion

In the primary market, Morgan Stanley crept through the pipeline and priced a HK$1.5 billion three-year floating-rate note at par with a coupon of Hibor plus 20 bps (A2/A/A).

Morgan Stanley acted as the bookrunner for the registered deal.

Morgan Stanley is a New York-based bank holding company.

LatAm sinks on speech

Latin American trading became "very convoluted," IDEAglobal's Alvarez said after secretary Geithner's speech, which helped torpedo equities.

The shocks that went through U.S. equities were "trickling into LatAm," he said, but not pouring in.

Emerging market equities fell, but not severely, currencies remained weak and "debt markets are a touch lower," Alvarez said.

The high-betas in Latin America fell, but ahead of Sunday's referendum to keep Hugo Chavez in office as the president of Venezuela, "there really haven't been a lot of adjustments," Alvarez said.

What losses there were for the Venezuelan credit were also exacerbated by sinking oil prices.

Light sweet crude was seen trading at $37 per barrel.

The 9¼% Venezuelan sovereigns due 2027 shed 1 point to 50 bid.

Fellow high-beta Argentina lost 2 points from the 8.28% Argentine discount bonds due 2033, which traded at 30.5 bid, 33 offered.

In Mexico, investors were troubled by a tumbling peso, which forced the hand of the government to pump in $1.1 billion to support the currency.

The action helped to calm investors' nerves as the amount to help the peso "is a very small amount," Alvarez said. "They still have $84 billion in reserve, so they have dry powder."

The 8 1/8% Mexican bonds due 2019 were off by 0.875 point at 96.3 bid, 96.55 offered.

Meanwhile in Brazil, there have been some rumors of a corporate issuer stepping onto the stage, but "I don't think anything's going to fly after this," Alvarez said about the thrashing on Wall Street.

The 7 1/8% Brazilian bonds due 2037 lost 1.15 points to 99.85 bid, 101 offered.

Emerging Europe gets 'defensive'

Emerging Europe also dropped while investors had their eyes on the markets in the United States.

"It caused some weakness this morning," a trader said about the speech.

"It seemed like things stabilized a bit" and "set the tone for a defensive session," he said.

In Russia, conflicting reports circulated that the government was supporting talks between major businesses and lenders to restructure a total of $400 billion in debt.

The government issued denials of any debt restructuring initiatives, reports also said.

Meanwhile in Ukraine, prime minister Yulia Timoshenko told a German newspaper that she and her party are ready to rekindle the relationship between Kiev and Moscow.

"We have two options in our relations with Russia: either we aggravate confrontation and deepen the conflict, which would have negative consequences for the entire region, or despite all differences in views we will seek better cooperation. I, as the prime minister, have chosen the second option," Timoshenko told the Frankfurter Allgemeine Zeitung.

Timoshenko also made her case to clear Ukraine of blame for the recent gas crisis, which left many European countries with dangerously low fuel supplies.

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