Emerging markets find small rally; Venezuela's bonds add to gains; market spreads tighten

By Aaron Hochman-Zimmerman

New York, Feb. 19 - Emerging markets managed to find some investor interest at the lower price levels, which had accumulated over a difficult week.

Prices held in most places where slight gains did not claw back some of what had been lost.

By the end of the session, many felt that the limited trading would give way to an entirely silent Friday, but others were reserving judgment.

"Never say never," a buyside source said.

Still, "I would not be surprised to see something next week," a strategist said about the primary, although nothing solid has yet presented itself.

In trading, "Venezuela has been rallying a lot," the buysider said, as firms began to tag the credit with buy recommendations.

With the renewed interest, "the dealer community was caught short," the buysider said.

The bonds due 2027 tacked on another 0.75 point to Wednesday's 3-point gain.

Meanwhile in the major markets, investors held their collective breath as U.S. equities hovered at a floor which had held since November 2008.

Wall Street initially looked promising but gave up its early gains, although volatility managed to ease by 1.38 to 47.08, according to the VIX index. The index is a common measure of market volatility.

Treasuries were knocked lower on Thursday, which allowed emerging markets to tighten by nearly 30 basis points to a spread of 660 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 stops skid

Emerging Europe had a "better tone generally," a trader said. "It's a feel better day."

"It's been quiet all week though," he said about the category.

The short week in the United States may be partially to blame, but "it would've been quiet anyway," he said.

"By now it's too late," he said during London's afternoon. The market will have to regroup over the weekend and move forward on Monday.

"The world's going to get a lot better or a lot worse," he said, and now the best anyone can do to decide is "toss a coin up."

Turkey was one of the winners on Thursday.

"It's still way off, but it stopped falling for now," the trader said.

"It literally just crumbled 15 points or so on nothing," he said about the battering Turkey received over the last week.

Meanwhile late Wednesday, the Turkish parliament approved a stimulus package that will cut taxes on automobiles and communications, the Hurriyet Daily News reported.

Lawmakers also raised the minimum wage to $440 per month.

The stimulus law also allows the cabinet to cut other taxes on investments and manufacturing.

The Turkish sovereign bonds due 2030 added 0.25 point to 127 bid, 127.5 offered.

Also in emerging Europe, Ukraine's parliament speaker, Vladimir Litvin, said he believes the recent gas contracts with Russia will not be renegotiated soon, according to the Itar-Tass News Agency.

Litvin added that Ukrainians need to concentrate on finding the best way forward for the country.

"Today we should think about how to live further, how to overhaul the Ukrainian economy, how to use our energy sources, how to ensure the energy balance in the country, and how to introduce renewable energy. One simply has to work," Litvin said in the report.

The issue of a $5 billion loan from Russia is still a possibility and would be welcome, Litvin said.

"If Russia has free money, it can give a loan, and I think this will benefit both Russia and Ukraine, but the terms should be clear and generally acceptable," he said.

The Ukrainian bonds due 2016 were quoted at 37 bid, 39 offered, while the Russian government bonds due 2030 added 0.75 point to 89.5 bid, 90 offered.

LatAm bounces

Latin America also improved as "the market feels a little better," a strategist said.

Spreads tightened on Treasury action, but "equities are still not feeling well" and "that will have an impact on credit," he said.

Bellwether credits such as Brazil led the way for the category, he said, as the bonds improved in cash and spread terms.

The 11% Brazilian bonds due 2040 were quoted at 124.2 bid, 124.4 offered.

"High-grade paper is doing well," he said.

Venezuela continued to behave like a long-term portfolio piece as "we continued to see better buyers coming into the market," he said, including "cash and more speculative types of money."

In Venezuela, one of president Hugo Chavez's first official acts as a president with freshly lengthened term limits was to meet with China vice president Xi Jinping.

The two discussed the energy and trade policy between their countries.

Both countries committed more money to their joint investment account, which now holds $12 billion, some of which is intended to build a new refinery in China to process Venezuelan crude, the BBC reported.

China imports nearly 330,000 barrels per day from Venezuela, the report said.

The 9¼% Venezuelan government bonds due 2027 added 0.75 point to 54.75 bid, 55.25 offered.

Elsewhere, the higher-beta credits, such as Argentina, "have widened on the day," he said.

The 8.28% Argentine discount bonds due 2033 sank 1.5 points to 28.5 bid, 29.5 offered.

Asia hurt by Indonesia indecision

Finally, Asia tried to hang on to its outperformer status on Thursday.

"Outperformance is warranted at least versus emerging Europe," a buysider said, but not necessarily versus Latin America.

It has been mostly the Philippines posting strong numbers, with Indonesia lagging as "we're still trying to figure out what is happening with [the proposed new issue]," the buysider said.

The Indonesian sovereigns due 2018 were quoted at 77 bid, 80 offered.

Meanwhile in the Philippines, foreign aid to public projects was halved in 2008, said the National Economic and Development Authority, according to the Manila Times.

Infrastructure projects, which operated with foreign capital, had only $781 million to spend in 2008, compared to $1.9 billion in 2007.

The Asian Development Bank pulled back its support the farthest, the report said.

Its aid was cut by 83% to $419 million.

The Philippine government bonds due 2030 were seen at 114 bid, 115.5 offered.

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