Emerging markets dive on 25 bps rate cut; high-betas bleed the most; primary closed for year, some say

By Aaron Hochman-Zimmerman

New York, Dec. 11 - Emerging markets followed equities as they were dragged under by the 25 basis point rate reduction from the Federal Open Market Committee. Many had been hoping for a bigger 50 bps easing.

After sessions which saw many issuers and traders avoid action in anticipation of a decision from the Fed, the FOMC pushed interest rates down to 4.25%.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the accompanying Fed statement said.

"Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time," the report said.

The committee members noted that inflation numbers have recently improved, but the problem is still cause for concern.

"...the committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully," the report said.

The primary, which had only crept along in recent sessions was completely knocked off its tracks.

In trading, the high betas took the most punches while some other credits were able to keep to their feet.

Argentina saw its discount bonds due 2033 lose 2.5 points. Venezuela's sovereigns due 2027 dropped 2.25 points. On a spread basis, both were wider by 33 bps.

"A lot of people in emerging [markets] were trying to buy protection," a buysider said.

"There's been significant damage to the market and we haven't seen the turn around in the numbers," a syndicate desk official said.

Further interest rate cuts of up to 75 bps to 100 bps may be coming over the next six months, he said.

The buyside source agreed that "the subprime market issue is definitely deep."

However "the economic data do not support the need for the Fed to go that low," he said.

"I think it was a little overdone on the equity side," the buysider said.

Many investors believed a 25 bps cut was already priced into the market.

"How come they were rallying already?" he asked about the past few sessions in equities.

Volatility held flat until the Fed announcement, after which the VIX index rifled up 2.85 to 23.59. The index is a commonly accepted yardstick of market volatility.

Emerging markets blew out wider as Treasuries rallied. The EMBI+ index widened 18 bps to a spread of 243 bps, according to JP Morgan. The EMBI+ determines the amount of extra yield investors are demanding to keep money in emerging markets debt.

The Treasury rally is "not making people think the economy is in great shape," a portfolio manager said.

LatAm, high-betas battered by rate cut

Latin America's high-betas fell the hardest after the FOMC released what the market considered sour news.

"The outperformers of the last few sessions were the hardest hit today," a syndicate desk official said.

"Credit will continue to widen as a result of this," he said about the rate reduction.

"Libor is out; that's affecting our market," he added.

Argentina spent its first full day under new president Cristina Kirchner as the big loser in the high-beta bond world.

The 8.28% discount bonds due 2033 were up as high as 100.3 bid, but after the Fed announcement fell off a cliff to the tune of 2.5 for the day. The bonds were spotted at 97.25 bid, 97.75 offered.

Venezuela's high-beta government bonds took a similar beating after the news of the rate cut.

The 9.25% bonds due 2027 lost 2.25 to trade at approximately 99 bid, 100 offered.

Brazil's sovereigns were lower, but its issues were able to cling to their traditional stability.

The 11% bonds due 2040 were lower by 0.375 to about 134 bid. The Brazilian bonds due 2037 were quoted at 114.1 bid, 114.6 offered.

Elsewhere, Bolivia's constitutional assembly approved a proposal to end term limits for president Evo Morales. The reform would need to be voted into law by a referendum which Morales is likely to lose, said a syndicate official who recently returned from Bolivia.

The proposal only represents the wishes of 30% of the country, the ethnic-Andean sector, he said.

"Two-thirds of the country are against him," he said, including six of the nine state governors.

"People are starting to die" during daily anti-government protests, he added.

There is a significant Venezuelan military and Cuban presence in the country and "the economy is not going anywhere," he said.

Because the government has done nothing to develop its energy resources, "they are missing on this whole global commodity bull market," he said.

"It's a complete disaster," he said.

Emerging Europe hangs on

Emerging Europe's credits held in relatively well on light trading after the Fed cut the legs out from under the more high-beta issues across emerging markets.

"There was not that much flow surprisingly," a syndicate official said.

Many market watchers are holding out little hope for big action in the next two weeks leading up to Christmas.

Still, the syndicate official noted that in Israel, the predominantly Muslim countries of the Middle East and in predominantly Orthodox Russia there may be more time to do business.

Christmas is celebrated in Russia on Jan. 7.

In Russia, the day after president Vladimir Putin gave his endorsement to first deputy prime minister Dmitry Medvedev as the United Russia party's candidate for president, Medvedev returned the favor by offering Putin's name for prime minister at the end of his term as president in March.

Medvedev has served as Putin's chief of staff, the director of various social projects and as the chairman of OAO Gazprom. He is seen by many as economically liberal and pro-business.

After United Russia's recent victory in parliamentary elections, both men are widely expected to win the offices proposed for them.

The Russian benchmark bonds due 2030 only stepped back by 0.125 to trade at 113.5 bid.

Elsewhere, the Turkish government bonds due 2030 dipped by 0.875 to a 157 bid.

Asia yet to feel effects of rate cut

Trading in Asia was over by the time the news of the rate cut came from the Fed, which kept prices mostly unchanged on the day, a buyside source said.

The Philippines' government bonds were off by 0.25 to trade at about 134 bid, 134.75 offered.

Investors from South Korea toured Indonesia on Monday to examine possible investments in infrastructure projects, reported the Jakarta Post.

No deals or further details have been announced by Indonesian ministers or the representatives of the Korean companies.

The Indonesian sovereigns due 2017 dropped 0.625 to 103 bid, 103.375 offered.

In Pakistan, government bonds due 2017 fell 0.5 to 89 bid, 92 offered.

Primary left to the local deals

"That's pretty much closed us down for the year," a syndicate official said about the affect of the rate easing on the major-currency primary.

The official said he might have expected some of the larger and more liquid issuers to try to place a bond before the Christmas break, but now that will have to wait for January.

There may still be a chance for deals to move in countries across the Middle East and Asia, or in Russia where Orthodox Christmas is celebrated on Jan. 7.

However, "I haven't seen a single announcement or comment," he said about the day's primary.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.