Emerging markets rally; flu pandemic fears fade; equities help tighten spreads; Venezuela up

By Aaron Hochman-Zimmerman

New York, May 4 - Emerging markets began the week at full tilt as credits followed equities upward while the S&P 500 index topped 900 points.

"Today was a rockin', rollin' day," a syndicate official said.

"People are rotating their assets back into riskier assets," he said.

Many in and out of the market also began to take deeper and easier breaths as the swine (H1N1) flu seemed to have less of a grip on Mexico and its economy.

Venezuela also continued to push its levels higher as its benchmark bonds due 2027 tacked on 1 5/8 points.

On the primary side, the market remained quiet and watchful.

Elsewhere equities improved while volatility fell by 0.77 to close at 34.53, according to the VIX index. The index is a frequently used measure of market volatility.

As a sector, emerging markets pulled tighter by 8 basis points to a spread of 519 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.

Temperatures lower in Mexico

Investors' fevers caused by the possibility of far-reaching effects of the swine (H1N1) flu on Mexico's economy seemed to have broken by Monday's close.

Mexican spreads were tighter by nearly 15 bps, a syndicate official said.

"Citing an ebb in the number of swine flu cases, Mexican officials said Monday that they would lower the public alert against the virus," the New York Times reported.

The market was in a largely buying mood and took the news as an opportunity to shift into more risk, the syndicate official said.

Still, on the corporate side, Cemex SAB de CV improved on Monday but is in "so much debt" that another attempt at a debt issue will not happen quickly, he said, "not for a while."

The peso was seen trading at 13.327 to the dollar.

The 5.95% Mexican government bonds due 2019 were quoted at 100 bid.

LatAm gaining ground

While fear subsided in Mexico, the rest of the category was led higher by the high-beta credits Argentina and Venezuela.

The two tightened by 15 bps and 25 bps, respectively, as "Venezuela has been an outperformer" in recent sessions regardless of oil's recent high at $54 per barrel.

The 9¼% Venezuelan government bonds due 2027 were better by 1 5/8 points to 65 7/8 bid, while the 8.23% Argentine discount bonds due 2033 jumped by 2 points to 30¼ bid.

Argentina improved, but its discount bonds could not catch the levels of Ecuador's two defaulted bonds.

The 12% Ecuadorian bonds due 2012 added 1 point to 31½ bid.

Also, the 9 3/8% bonds due 2015 were seen at 44.7 bid, while the 8% bonds due 2030 were quoted at 31½ bid.

Also in Panama, supermarket chain owner Ricardo "El Loco" Martinelli was declared the winner of Sunday's presidential election, reports said.

The conservative Alliance for Change candidate won the landslide as the country is undertaking a project to revamp the Panama Canal Zone.

The nickname "El Loco" was self-promoted after enemies spread rumors that Martinelli suffered from bipolar disorder.

The 7¼% Panamanian bonds due 2015 were spotted at 106½ bid.

Emerging Europe up on stocks, IMF loan

Emerging Europe was encouraged by a good showing for U.S. equities and positive data.

Romania was granted approval for a $17.1 billion emergency loan from the International Monetary Fund, reports said.

Of the total, $6.6 billion is currently available to the struggling economy.

The Romanian bonds due 2010 were seen trading at 100.85 bid.

In Russia, deputy prime minister Igor Sechin alerted the European Union that Ukraine may not be able to reliably supply the West with gas in the future, reports said.

Russia continued to press Kiev to buy 19.5 billion cubic meters of gas to bolster its reserve in order to avoid another crisis.

"If this is not done, the tragedy that we lived through in January will develop catastrophically," Sechin said.

As much as 80% of Russia's continental gas sales are transported through Ukraine, but many have pushed for the construction of the planned South Stream pipeline, which would cut out Ukraine by connecting western Europe to Russia via the Black Sea.

Also in emerging Europe, in Turkey a number of cabinet ministers were fired, but the financial sector approved of the addition of Ali Babacan as deputy prime minister for the economy.

The lira was seen trading at 1.5682 to the dollar.

Asia strong on equities

Asia tightened during another charge led by equities.

Meanwhile in the Philippines, the central bank released a report touting the Filipino banking sector's resiliency in the face of the world's ongoing crisis.

"Banks' balance sheet remained strong as key accounts continued to register growths beyond expectations as indicated by the double-digit asset, credit and deposit expansions," the central bank said in a release.

While many other financial systems were shaken to the core, "... the positive performance benefited largely from earlier financial sector reforms and long bouts of sustained profitability," the release continued, referring to newer technologies and client-driven services.

In Indonesia, during a presentation in Bali, where the Asian Development Bank is holding its 42nd annual conference, a panel of experts argued that Asia "must bolster cooperation" in order to best survive the financial crisis, according to an ADB press release.

"Asean is the most established regional organization present today in Asia and it is well placed to be a hub of closer cooperation in the future as it provides an insight into how Asian regionalism might develop more broadly," said ADB vice president Xiaoyu Zhao.

The difficult conditions present in the world's economy may also produce some opportunities, the panel said.

"The global economic crisis has created a major window of opportunity for strengthening regional economic institutions," said Andrew MacIntyre, director of the Crawford School at the Australian National University.

In the last 10 years, the developing Asian economies have made great improvements toward integration but still lag other developing areas, particularly in eastern Europe.

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