Emerging markets edge downward; desks see low holiday volumes; Treasuries tighten spreads

By Aaron Hochman-Zimmerman

New York, May 21 - Emerging markets gave back some recent gains on the last full day of trading before the Memorial Day holiday in the United States.

The damage was mitigated by low holiday volumes as many desks were also left empty for the religious observance of Ascension Day.

More of the same low volumes are expected during Friday's abbreviated session in the United States.

Still, on Thursday, the primary market seemed to have put a recent spate of issuance behind it while issues traded lower along with stumbling equity markets.

The Philippines' benchmark bonds due 2030 settled flat by the session's close, along with much of Asia. The category worked to absorb the new bonds from Power Sector Assets and Liabilities Management Corp., which improved by 1/8 point.

From the major markets, equities were dragged lower and volatility was pulled above 30.00 as it closed higher by 2.32 at 31.35, according to the VIX index. The index is a common measure of market volatility.

On spiking Treasury yields, emerging markets managed to tighten by 4 basis points to a spread of 471 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

Asia quiet, defensive

"It's actually been quiet" in Asia, a trader said, although with a "defensive" tone.

Still, spreads were significantly tighter as Treasury yields launched, he said.

The new bonds from the Philippines' Power Sector Assets and Liabilities Management Corp. mostly traded in Asia and inched higher by 1/8 point to 100¾ bid, 101¼ offered.

The supply gave investors an excuse to ease off of the Philippines' government paper, which had "come quiet a long way," the trader said.

Also in the Philippines, businesses were heartened in the second quarter by a confidence index that rose 21.3% to negative 2.6% from negative 23.9%, the central bank said in a statement.

The outlook for the third quarter also improved as it jumped by 13.7%.

"This optimism was driven by improving confidence in the U.S. and global financial markets, an upshot of the fiscal stimulus package committed by G20 nations," the bank said.

The Philippine government bonds due 2030 were unchanged at 123½ bid, 124½ offered.

In Pakistan, the status of international aid was called into question when reports surfaced that it is still putting money into its nuclear weapons program.

However, the Wall Street Journal reported that Islamabad has begun sharing intelligence on the activities of Islamic extremists with India and the United States.

The Pakistani bonds due 2017 were spotted at 58 bid, 62 offered.

Also, in Indonesia the bonds due 2019 backed up by ½ point to 125 bid, 126 offered.

Emerging Europe tightens

Emerging Europe tightened slightly on Treasury action but saw slight to lower movement of cash levels.

Poland filed a $4 billion shelf with the U.S. Securities and Exchange Commission, prompting discussion of an upcoming bond, but nothing firm was announced by Warsaw.

In Ukraine, the January 2010 election started to take shape as prime minister Yulia Timoshenko announced that she would challenge her former Orange Revolution ally, president Viktor Yushchenko, for his office.

"These seven months can be used quite successfully. You know that our team is steering toward the presidential elections," she said, according to the Itar-Tass News Agency.

Meanwhile, Timoshenko has also called on Yushchenko to sack his defense minister, Yuri Yekhanurov, over corruption allegations.

Yekhanurov has denied any wrongdoing.

Meanwhile, in Russia, the government waited to respond to a request from Kiev for a $5 billion loan.

"Ukraine asked for the loan in February 2009. The request is under consideration. The loan has not been granted," deputy finance minister Dmitry Pankin said, according to reports.

Similarly in Turkey, finance minister Mehmet Simsek said the country is in need of a financial recovery plan, regardless of the results of negotiations with the International Monetary Fund.

"We need fundamental measures. We in no way underestimate this crisis. This crisis is affecting Turkey's real economy and will continue to affect it," Simsek told parliament, according to the Hurriyet Daily News.

In recent weeks, Ankara had been close to arranging terms for nearly $50 billion in aid, but the talks have stalled.

Simsek's comments came after central bank governor Durmus Yilmaz suggested the country have an alternative plan to an IMF loan.

LatAm slides toward weekend

Latin America traded slowly during religious observances in the local markets and the day before the Memorial Day early close in the United States.

In Brazil, president Luiz Inacio Lula da Silva said he will not stand for re-election in 2010.

Current chief of staff Dilma Rousseff is expected to follow Lula as the Workers' Party candidate.

The Brazilian constitution prohibits a third term; however, Lula's counterpart in Colombia, Alvaro Uribe hopes to win an extra term.

The Colombian Senate voted to hold a popular referendum to determine if the people would change the constitution to allow Uribe to seek a third term in 2010.

It is widely believed that such a measure would pass.

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