Emerging markets end with positive tilt; trading sees low May Day volumes; Mexico improves

By Aaron Hochman-Zimmerman

New York, May 1 - Emerging markets finished a volatile and unusual week by trading slightly lower while retaining a positive tone.

The worldwide flu outbreak inspired a great deal of speculation over its effects, but when asked if it will continue to weigh on the market, a trader said: "the market thinks, no ... equities think, no."

Heading into the May 4 week, the trader said that the week with all of its unusual twists was not enough to break the market's upward trend.

"It's the sort of trend you have to go with," until it is decisively broken, he said.

For the coming sessions, if given an otherwise even choice, "I'd be slightly long," he said, "even if you're relatively bullish."

Mexico, which remained at the center of the discussion all week, was seen only mildly lower, but "today is May Day, so you've got most of everyone out," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Also, from the major markets, volatility fell by 1.20 to close at 35.30, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets tightened by 5 basis points to a spread of 524 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Mexico slightly lower

Latin America was a little softer as the week ended, but for all the noise about swine (A-H1N1) flu, "Mexico is not really doing much,"said IDEAglobal's Alvarez.

The peso traded flat and credit was "a tiny step lower," he said. "We've come off a bit and nothing else."

After the market's "kneejerk reaction," there has been "no follow through," he said.

The peso was seen trading at 13.805 to the dollar.

The 5 7/8% Mexican bonds due 2014 slipped just 1/8 point to 104.2 bid, 105½ offered.

LatAm weaker with stocks

Elsewhere in Latin America credits drifted a bit lower as equities eased into the weekend.

In Ecuador, finance minister Elsa Viteri held a conference call in order to sell the country's plan to settle defaulted debt due 2012 and 2030 at a 70% discount.

A recent letter sent to the government on behalf of the holders of nearly $130 million of outstanding debt demanded payment in full.

However, nearly another $500 million in debt exists and may possibly be held by someone within or with close ties to the government, said Alvarez.

If an ally holds the debt, "that'll be more difficult to get that through," he said about the petition from the debt holders.

The government itself may have also recently purchased a large block of debt, but the market has not been able to determine the exact status of the debt.

The defaulted 12% Ecuadorian bonds due 2012 were seen lower by ½ point at 30½ bid, 32½ offered.

Among the high-beta credits, the Argentina discount bonds due 2033 fell by ½ point to 28¼ bid, 29 offered, while the Venezuela 9¼% sovereign bonds due 2027 gave back ¾ point to 64¼ bid, 65.35 offered.

Positive tone in emerging Europe

Emerging Europe was "really, really dead," on Friday, according to one London-based trader, but also in London, another trader said he was moderately busy on Friday.

"It's been reasonably active" since Wednesday, he said.

"Monday and Tuesday were a bit of a waste," he said.

Still, the tone ended positive, and with many headlines and market data under the bridge, the outlook for the coming week was positive, he said.

Turkey priced $1.5 billion bonds late on Thursday, which were traded up as high as 1 point, he said, but the new 7½% bonds that priced at 99.285 finished Friday at 99¼ bid, 99¾ offered.

The Turkish bonds due 2030 were seen near 145 mid.

In Russia, authorities estimated that 400,000 people took part in May Day celebrations around the country.

The Russian bonds due 2030 were seen trading at 97½ bid, 98 offered.

Asia tighter on May Day

On May Day in Asia, levels were reluctant to make major moves on slight volumes even as spreads pulled tighter on Treasury action.

In Indonesia, the regions financial leadership began to arrive in Bail where the Asian Development Bank will hold its 42nd annual meeting Saturday through Tuesday of next week, according to an ADB press release.

Many of the 3,500 expected guests will discuss the proper Asian response to the global financial crisis, the release said.

Also in Pakistan, a week's worth of fighting between government forces and Taliban militants was capped with largely unsuccessful talks to end the hostilities.

Reports said that both sides wish to halt the violence but could not reach an agreement on terms.

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