Emerging markets bashed by externals; Venezuela bonds stable on Chavez victory; spreads kick wider

By Aaron Hochman-Zimmerman

New York, Feb. 17 - Emerging markets were again held captive by major markets and equities, which sank as president Barack Obama signed the $787 billion economic stimulus bill in Colorado.

As equities challenged the lows of 2008, investors went straight for Treasuries.

"The flight to quality was the big theme of the day," a syndicate official said.

All eyes were on equities, and even though the lows of 2008 seemed to hold by the end of trading, "you need real progress," the official said.

Headline risk will be hard to fight if levels are bound to an economy that shows no signs of pulling up from its dive.

The stimulus plan "is not perfect," he said, but "you can't have all these people complaining about a lack of a stimulus plan."

"I don't think it's fair; too many people are opposing it for the wrong reasons," he said.

Meanwhile in trading, Venezuela largely survived the possible negative reaction to a referendum, which may allow president Hugo Chavez to remain in power for another dozen years.

It was Argentina which fell the farthest in the category by losing 2.5 points from its discount bonds due 2033.

Volatility jumped 5.73 to 48.66, according to the VIX index. The index is a common measure of market volatility.

With Treasury yields digging lower, emerging markets widened by 32 basis points to a spread of 693 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.

Emerging Europe catches equity sickness

Emerging Europe was quiet in trading as the external markets fell all around it, a trader said.

"It's puking; it's pretty horrible," he said.

"We're watching equities, oil, gold ... it's the same old story," he said.

In Russia, the state-run oil firm OAO Rosneft accepted a $25 billion loan at 6% from China in exchange for a long-term guarantee of energy supplies, the RIA Novosti News Agency reported.

The guarantee of supply cost China 1% from the loan, which had fetched 7% in the past, the report said.

Russian deputy prime minister Igor Sechin said the loan "suited both parties."

Russian officials were in Beijing on Tuesday to sign an agreement to build a pipeline branch from Siberia into China.

"It's all politics," the trader said.

Meanwhile, the Russian Economic Development Ministry forecast the 2009 GDP at 2.2%, or 0.2% lower than previously expected, said deputy economic development minister Andrei Klepach, according to the Itar-Tass News Agency.

"The industrial output forecast is down to minus 7.4%," he added.

"The exodus of investments by the end of the year will reach 14%," he said.

The Russian government bonds due 2030 lost 1.125 points to 89.375 bid.

In Turkey, the lira was pounded again as the head of the International Monetary Fund, Dominique Strauss-Kahn, asked Ankara to coordinate its stimulus efforts with other regional players, the Hurriyet Daily News reported.

Strauss-Kahn also suggested a larger-scale stimulus plan, in the vein of the United States' plan, he said.

The lira was seen trading at 1.6956 to the dollar.

Argentina hurt

Latin America was smashed by plummeting equities, spiking volatility and a festering tone.

"Everything traded with Treasuries," a syndicate official said.

A consolation prize came from Mexico, where the new 5 5/8% bonds due 2014 held up at 99.5 bid.

The bonds priced at 99.424 on Feb. 11.

The 8 1/8% Mexican bonds due 2019 slipped 0.8 point to 98.5 bid.

In Argentina, the farm leaders expressed their frustration over the lack of communication from the government regarding further negotiations over the export tax issue, the Buenos Aires Herald reported.

"There has to be some sort of progress on the export duties issue in order to continue dialogue," said Eduardo Buzzi, head of the Argentine Small Farmers Federation, in the report.

Buzzi also asked that the government not continue its strong-headed tactics carried forward by domestic trade secretary Guillermo Moreno.

"They should try not to send Guillermo Moreno to hinder, like he did during the whole process last year," Buzzi said.

"Then, the government's will was to lead us to confrontation," he said.

The 8.28% Argentine discount bonds due 2033 were slammed for 2.5 points to 29.5 bid.

In Venezuela, president Hugo Chavez finally won his referendum bid to extend his term limit to allow him another 12 years in office.

Chavez billed his future leadership as a victory for continued socialist reforms and social spending, although many have noted that his social programs depended heavily on high oil prices.

Oil, which traded as low as $34.5 on Tuesday, has left the Venezuelan treasury in a difficult position.

The 9¼% Venezuelan government bonds due 2027 slipped just 0.5 point to 50.5 bid.

Asia sees equity shocks

Asia was beaten back on Tuesday as investors made a run for Treasuries.

Low volumes kept cash prices close, but spreads were pulled wider.

In Indonesia, bonds and other debts may be guaranteed by the Asian Development Bank, the Jakarta Post reported.

"We are exploring a guarantee facility in support of bonds, loans and other debt instruments issued by the government of Indonesia. The guarantee will help lower the cost of financing," ADB president Haruhiko Kuroda said in the report.

ADB is prepared to offer Indonesia a total of $1.75 billion in loans broken into $750 million in project loans, which have already been prepared. The remaining $1 billion will be comprised of $500 million in program loans and $500 million in standby loans.

Elsewhere in the Philippines, the National Economic and Development Authority announced that the federal budget will be balanced by 2011, according to the Manila Times.

The original deadline for balancing the books had been in 2008, but the timeline was pushed back in order to "pump-prime the economy," said NEDA director general Ralph Recto in the report.

Still, "we do not want the spending to swell our national debt to worsen inflation or to crowd out private initiative," he said.

Therefore, "we seek to increase our national government deficit within prudent limits. The international benchmark for the deficit is 2% of GDP," Recto said.

The peso was seen trading at 47.8 to the dollar.

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