Emerging markets sputter; Ecuador's bonds bounce from lows; spreads yanked wider; Brazil bonds rise

By Aaron Hochman-Zimmerman

New York, Nov. 18 - Emerging markets were mostly weaker on Tuesday as equities provided little leadership.

Credit continued to follow equity trends, which were flailing in the Asian overnight and lower in the United States until "it stabilized a bit today," a trader said, which helped temper loses.

The market "had really been soft up until about 3 o'clock," he said in the New York afternoon.

In trading, investors watched Ecuador rebound from sub-default level lows as opportunists boosted the country's bonds due 2012 by 4.5 points.

Ecuador remains on the brink of default, but the bottom-fishers were heartened by the difficult position Ecuador would be in if it chooses to skip its payments or default.

Elsewhere, volatility climbed throughout the afternoon until a late-day drop, which left the VIX index lower by 1.51 at 67.64. The index is a common measure of market volatility.

Despite the equity rally, emerging market spreads were ripped wider by 32 basis points to a spread of 707 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.

LatAm holding in

Volume slowly flowed back into Latin America, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Still the market is "not totally clean and clear," he said.

"Every time [credit] comes under excessive market pressure it tends to widen out the bid-offer spreads," he said.

In Argentina, labor leader Hugo Moyano, head of the General Labor Confederation, acknowledged the onset of a recession and announced an upcoming legislative proposal that would triple severance pay for laid-off workers.

Previously Moyano had said that layoffs and the need for higher severance pay were not immediate threats, but he has drastically changed his position, the Buenos Aires Herald reported.

"There are several signs that show there is a recession, the situation is worsening," Moyano said in the report.

"Not long ago, we did not have information about any dismissals, but now it is happening," he said.

The 8.28% Argentine discount bonds due 2033 were seen unchanged at 26.25 bid, 27 offered.

"It's been a touch stronger," Alvarez said about Argentina. "It's been bouncing around for the last couple of days."

On the days when other credits in the market are weaker, particularly Ecuador, "Argentina takes some collateral damage," he said, "but that's more to do with position and the way books are run nowadays."

Elsewhere, Brazil's 7 1/8% sovereigns due 2037 were 1.3 points lower at 93.9 bid, 94.2 offered.

Also in Latin America, China president Hu Jintao met Cuba's current leader, Raul Castro.

China's involvement in Latin America has increased greatly since the collapse of the Soviet Union, and it is the second-largest trading partner for Cuba, after Venezuela.

Cuba also has a number of Chinese loans coming due, which were expected to be a topic of conversation between the two heads of state, the BBC reported.

Waiting for Ecuador

The market was stunned by "a variety of mixed signals" from Ecuador's leadership, Alvarez said.

Finance minister Maria Elsa Viteri has said the country "is not going to pay what they deem to be illegitimate debt," Alvarez said.

"While the finance minister is out there stirring the cauldron," he said, "the president took a step in the other direction."

President Rafael Correa has discussed the possibility of reaching out to the Inter-American Development Bank for an infrastructure loan as well as pairing back social spending, he said.

Even if the conflicting messages are some sort of "test balloon" to gauge the market's reaction to both options, it is a risky strategy.

Too much agitation will encourage investors to decide that "they won't touch you again," he said.

Still, "there were some takers" of Ecuador's bonds. Many saw 4-point to 6-point gains on Tuesday.

"They're sitting pretty right now," Alvarez said about the bottom-fishers who scooped up Ecuador on the cheap.

"Venezuela may be a determinant" for Ecuador, he said.

Most investors understand that regional power and Ecuador's ally Venezuela stands to lose close to $400 million in the event of an Ecuador default when the Nov. 20 report is released.

Ecuador's 12% bonds due 2012 were quoted up 4.5 points at 25.5 bid, 30.25 offered.

Asia loses traction overnight

Asian credit markets were "generally worse" after equities were thrashed in the overnight session, a trader said.

China Construction Bank was one of the big losers as investors grew more concerned over Chinese financials.

"Regional stocks were all down," the trader said, which "put pressure on everything."

"We're 25 [bps] to 30 [bps] from the tights of yesterday," he said, adding that cash bonds were battered as well.

In the Philippines, as tax collections faltered, the budget deficit grew to PHP 62.3 billion compared to the expected PHP 41.5 billion for the first 10 months of 2008, according to the Treasury Department.

In October, collections hit PHP 92.6 billion, compared to PHP 83.7 billion in October 2007.

For the year total revenue increased to PHP 972.6 billion from PHP 896 billion during the same period of 2007; however, spending also increased to PHP 1 trillion.

Philippine issues were down from 2 points to 4 points on the short end and nearly 5 points on the long end of the debt curve, the trader said.

The Philippine government bonds due 2030 were quoted at 95 bid, 98 offered.

In Indonesia, economic growth ground to its slowest pace since early 2007.

The Indonesian GDP grew by 6.1% in the third quarter, compared to the third quarter of 2007, the Jakarta Post reported.

Despite the downturn, Indonesia's growth figures remained in line with other emerging Asian nations.

"Indonesia has been hit very, very hard in the last week or so," the trader said.

"Lower commodity prices help some economies more than others," he said.

Indonesia is "one of the biggest victims of lower commodity prices," he added.

The Indonesian sovereigns due 2018 sank 4 points to 62 bid, 66 offered.

Elsewhere, despite the promise of a new $7.6 billion rescue plan from the IMF, Pakistan's bonds due 2017 traded back toward their lows at 36 bid.

Emerging Europe lacks leader

Emerging Europe continued to suffer as Russia and Turkey's markets slipped farther from stability.

In Russia, as the market continues to slide on dwindling oil prices, president Dmitry Medvedev said the government may add $182 billion to its financial rescue package.

"About 5 trillion rubles is planned to be spent on stabilization measures," Medvedev said, according to the RIA Novosti News Agency.

"But this is not a final figure. We understand that additional decisions may have to be made given the scale of the problem," he added.

Also, he promised the support of the federal government for the regions.

A region suffering from the global economic slowdown will be able to apply to the government for a loan to ensure its liquidity, Medvedev said, according to the Itar-Tass News Service.

Medvedev has also been calling for a stronger international integration of the financial markets.

In Ukraine, the parliament is preparing to elect a new speaker after the pro-Russia opposition party, the Party of Regions, began the legislative process to remove Arseny Yatsenyuk.

Party of Regions representative Alexander Lavrinovich is one of the leading candidates, Itar-Tass reported.

In Turkey, nearly 10,000 people lost their jobs during October, according to human resource specialists, reported the Hurriyet Daily News.

Nearly 75% of those who lost jobs came from the financial sector, with the remainder from the retail sector, the report said.

Also in Turkey, officials signed a deal to broaden the energy trade with Iran.

The deal will "have positive reflections on both the regional as well as global levels," said energy minister Hilmi Guler, according to the Hurriyet Daily News.

One of the major projects expected to come from the agreement is a pipeline from the Persian Gulf port of Assaluyeh through the South Pars oil field to the Bazargan region bordering Turkey.

Ankara currently imports from Iran, but imports from the high-yielding South Pars field are expected to increase.

Also in emerging Europe, Belarus expects to finalize the terms of a $2 billion International Monetary Fund loan, prime minister Syarhey Sidorski said, according to reports.

Sidorski said that the loan should be considered as a benefit to the region's interdependent economies.

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