Emerging markets crunched; bright spots emerge; spreads at record wides; Ecuador, Philippines lower

By Aaron Hochman-Zimmerman

New York, Oct. 23 - Emerging markets were punished again on Thursday, but the pounding was easier to track as a tightening of bid-offer spreads gave traders a better view of the show.

If any silver lining can be attached to recent sessions, "there is more visibility to bid-offer spreads," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Earlier in the week, "spreads were as wide as 3 points, 5 points, 8 points; there was no trust whatsoever," he said.

A trader was not as cheery about the performance in the emerging markets.

"Emerging markets as a category is melting," he said.

"The trade of the decade is being unwound in a week," he said.

The only thing to do is "you get light, you get small, you have patience," he said.

In trading, high-beta Ecuador was joined at the top of the loser board by the Philippines as both lost 5 points from their benchmark issues.

From the major markets, volatility pulled back by 1.85 to 67.80, according to the VIX index. The index is a common measure of market volatility.

Spreads were still knocked wider to set a six-year wide. Emerging markets stretched by 46 basis points to a spread of 848 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors are willing to accept in order to hold assets in emerging market debt.

LatAm lightens sentiment

The market was far from recovered on Thursday, but small glimmers of hope began to turn up in Latin America as well as a few other places.

"Ukraine and Venezuela are two places that are very, very slightly firmer," Alvarez said.

"I don't think there's anything specific" causing the firmness, he said.

However, investors "with any semblance of liquidity" can "take paper off the market at half price," he said.

Whether this is a true case of bottom feeding is difficult to determine, he said, "maybe, but it's not a total certainty."

Also in Venezuela, the official producer of the distinctive Kalashnikov assault rifle, Russia's Izhmash JSC, announced that the first shipment of production equipment has reached its new client.

The final shipment is scheduled for 2010, the RIA Novosti News Agency reported.

"They also have some tank buying going on," Alvarez said, but investors are focused on crude.

Light sweet crude was seen trading as low as $66 per barrel.

The 9¼% Venezuelan bonds due 2027 were seen trading at 58 bid, 58.25 offered.

Fellow oil producer Ecuador was crushed by 5 points to 31 bid, 32 offered.

In Argentina, "you can call it flat" for the day, he said, but "it can't get much worse, marginally if anything."

The 8.28% Argentine discount bonds due 2033 lost 0.5 point to 23 bid, 25 offered.

Brazil was slightly improved after the government jumped into the currency market to save the real.

The central bank authorized the sale of $50 billion in currency swaps to bolster the real.

In the day's slight uptick, "Brazil is definitely one actor," Alvarez said.

The 7 1/8% Brazilian bonds due 2037 were better by nearly 2 points to 74 bid, 77 offered.

Gloom in Asia

Some bright spots around the market were not enough to warm sentiment in Asia.

"It's still pretty bad," a trader said.

"The Philippines has been a big underperformer," he said.

In the Philippines, customers were cheated out of their share of a fuel price cut by oil companies, the National Economic and Development Authority, according to the Manila Times.

Companies overcharged customers by an average of PHP 10 per liter of diesel and PHP 8 per liter of gasoline, the report said.

The high prices also likely drove up prices of any other consumer goods which needed transport, said NEDA director-general Ralph Recto.

"We know that oil prices contribute to inflation, thus checking inflation and lowering it would help the Bangko Sentral ng Pilipinas to improve the cost of borrowing money, which will also benefit the oil companies," he said.

The Philippine sovereign bonds due 2030 sank 5 points to 80 bid.

Elsewhere, "Pakistan and Indonesia both have outperformed in the last week or so," he said.

In Indonesia, an adviser at the Energy and Mineral Resources Ministry expects to see a scarcity of raw materials derived from mines in the next four to five years due to a lack of financing, according to the Jakarta Post.

"The stock market has been a major financing source for mining firms to get cheap funds that are usually used for exploration investment," said Simon Felix Sembiring.

"Since we will not have an expansive exploration activity, there will be no new reserves discovered. As a result, there will be a shortage in mining commodities for the next four to five years that will eventually drive up the prices," he added.

Some mining firms have already slowed or halted operations, the report said.

The Indonesian government bonds due 2018 were seen at 56 bid.

Meanwhile, "[South] Korea blew out, but found some relative support," a trader said, although, "there are still a lot of problems with the country."

"The Bank of Korea is really trying to quell the problems," he added.

The South Korean five-year CDS was seen at 575 bps bid, 600 bps offered.

Pakistan's safety net

"Pakistan certainly has found some stability," the trader said.

The chance that the country is able to find a lifeline from either a major economic power or non-governmental organization is "decent," he said.

"There're a lot of vested parties who would lose out if Pakistan fails," he said.

The Pakistani bonds due 2017 were seen up 1 point at 36 bid.

Emerging Europe deals with fires

Emerging Europe posted a relatively positive day on Thursday but still has a long fight ahead of it.

Russia made further attempts to fix its own problems, while Belarus and Turkey began to look for more outside help.

In Russia, the duma voted for additional anti-crisis measures to be included in the 2008 through 2010 budget, the Itar-Tass News Agency reported.

The vote provided for liquidity injections into banks, mortgage lenders and insurers.

"Such an approach matches world practices," said the chairman of the duma's financial market committee, Vladislav Reznik, in the report.

In Ukraine, political analysts told Itar-Tass that the early elections scheduled for Dec. 14 in the wake of the government fissure will squash hopes for the country to join NATO's membership action plan in December.

Ukraine will be considered for future membership when the alliance meets in Berlin in December.

The specter of default has followed Ukraine in recent weeks as issues of banking solvency and government stability have complicated negotiations with the International Monetary Fund for up to a $15 billion loan.

Ukraine was joined by its neighbor Belarus at the IMF relief line on Thursday.

Talks with the IMF will reportedly begin in Minsk on Monday.

After receiving a pledge from Russia for a $2 billion aid package, Minsk will ask the IMF for no less than another $2 billion.

In Turkey, the lira continued to drop, as the nation's economists became increasingly concerned that action to mitigate the effects of the global crisis has been too modest.

Commerzbank economist Ulrich Leuchtmann suggested that a new standby agreement with the IMF could prop up the lira, but with new elections looming, the government was not likely to yield authority to the IMF, the Turkish Daily News reported.

The lira was seen trading at 1.653 to the dollar.

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