Emerging market debt gains momentum as GM stays within expectations; Ecuador gains despite protests

By Reshmi Basu and Paul A. Harris

New York, April 19 - Emerging market debt staged a rally Tuesday as General Motors Corp. reported earnings that were in line with the market consensus and U.S. economic reports came in tamer than expected.

General Motors reported $1.1 billion in losses for the first quarter, hammered by rising healthcare costs and poor North American sales.

"The immediate impact, 30 minutes after the announcement, was that spreads were unchanged," said a debt strategist.

Emerging markets has been in a selling mode in recent sessions, ignited by bad news in the U.S. corporate sector, which has led investors to seek flight to quality. But Tuesday saw a break from the slide lower.

"It basically came in line with the doom and gloom the market has priced in already," the strategist remarked.

Adding additional support to emerging markets bonds, the U.S. producer price index and construction reports eased inflation concerns, said a market source.

The Labor Department reported that while PPI increased 0.7% for March due to surging energy prices, the closely watched core PPI rose just 0.1%, coming in weaker than forecasts.

And the Commerce Department reported that U.S. housing starts plummeted 17.6% in March, hinting that the U.S. economy is hitting a soft patch.

Panic over rising inflation in the United States should be over for now, said the market source. The core PPI is way down from analyst expectations, he noted.

Housing starts in the United States declined considerably to record lows - the steepest decline since 1991, said the source.

In response the bond markets rebounded. The 10-year Treasury finished the session to yield 4.21%.

All of this is good news for the emerging markets sector, remarked the source.

Indeed, emerging market bonds rebounded. The Brazil C bond rose 0.812 of a point to 99.687 while the bond due 2040 added 1.93 points to 113.60 bid. The Mexico bond due 2009 moved up 0.35 to 118.45 bid. The Russia bond due 2030 gained ¾ of a point to 105 1/8 bid.

The debt strategist added that market participants are trying to figure out if the selling is over.

"We've had a re-pricing of the global economic outlook in the last several weeks, he said.

"We are now priced to somewhat slower world growth and to at least a temporary slowdown in U.S. economic activity," he commented.

"You've had a number of major broker dealers emphasize the slowdown as being greater than the inflation risks.

"You've seen a substantial rally in very high quality bonds and you have seen some spread widening," he remarked.

The strategist said the action has been very sector specific, such as the auto sector, which "gets taken out and shot."

"Maybe it will be a different one next week. So it's a series of bumps rather than a broad-based flight from risk - like we saw last May."

Ecuador up, despite more protests

Ecuador's paper continued to move higher Tuesday, despite continued protests calling for president's Lucio Gutierrez's resignation over the dismissal of the Supreme Court.

The Ecuador bond due 2030 was up a quarter of a point in trading Tuesday to 85¾ bid while the bond due 2012 added ½ a point to 100½ bid.

Thousands demonstrated in Ecuador's largest city Guayaquil, chanting "Lucio, get out," late Monday. The city's mayor Jaime Nebot led the protest.

The country's parliament voted to dismiss the country's entire 31-member Supreme Court on Sunday, supporting Gutierrez's early action.

"I think we are waiting to see if the dismissal of the Supreme Court by Congress is sufficient to calm the situation or if there will be a renewed call for possible action to go after president Gutierrez," said the strategist.

He added that he is waiting to see how the situation evolves, given that Ecuadorian people do not seem to care much for the president, congress or anyone for that matter.

"I do not think we're in a situation where you are going to expect an early election from congress," said the strategist.

"If the congress wanted to impeach president Gutierrez, they already would have. He may still struggle through the end of his term - that seems to be the market handicapping at the moment," he observed.

Gutierrez was elected in a November 2002 run-off. His term runs until January 2007.

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