Emerging markets hammered; spreads wider on equity slump; Pakistan bonds gain 2 points in rebound

By Aaron Hochman-Zimmerman

New York, Nov. 19 - Emerging markets began the session slowly with only moderate loses despite the constantly gathering economic storm.

The clouds loosed the floods in the afternoon, dragging the Dow Jones Industrial Average below 8,000 and sending investors running for cover.

Emerging markets has done little to control its own fate in recent weeks.

"We're looking at stocks and oil and currency and the usual things," a trader said.

"The usual aspects are there," a strategist said about the market. "There is concern" as "the financials were hit pretty hard today."

In trading, action in the form of selling took over the doldrums despite the coming Thanksgiving holiday in the United States marking the home stretch into New Year's.

Issues were generally hurt across the board, although Pakistan made itself an exception by adding 2 points to its bonds due 2017.

The major story was still equities, which floundered at the end of the session.

The losses spiked volatility by 6.62 to end the day at 74.26, according to the VIX index. The index is a frequently used yardstick of market volatility.

Asia from bad to worse

Asia began the day lower after a mildly positive overnight session in the local markets, but U.S. equities broke loose any sense of order in the market.

"There's no end in sight," a trader said.

Over the past few sessions, even when glimmers of technical hope have briefly lifted spirits in the market, "that technical reason breaks down," he said.

"From a fundamental standpoint, there's nothing to like," he said.

In recent days, one of the most affected has been South Korea, which "across the board, continues to give guys a lot of fear," he said.

The five-year CDS was seen trading at 425 bps bid, 440 bps offered.

Also, after an inexplicable sell-off from near 40 bid to a mid-30s bid on Tuesday, Pakistan showed some strength by bouncing back to 38 bid, the trader said.

"In Pakistan I saw some buyers come in today, after selling off yesterday," he said.

Elsewhere, "nothing else was really spared," he said.

Still in the Philippines, the performance of the peso is expected to see a boost from foreign remittances, said central bank governor Amando Tetangco.

"In the case of the Philippines, in the fourth quarter, particularly in the later part of November and December, you see an increase in remittances that would provide support in the exchange of the peso," Tetangco said, according to the Manila Times.

Remittances were up by 16.9% year over year in September to $1.3 billion, the central bank announced on Monday.

Over the past 29 months, remittances have steadily registered totals above $1 billion, the bank added.

The peso was seen trading at 50.07 to the dollar.

The Philippine government bonds due 2030 fell 1 point to 94 bid.

In Indonesia, the government considered cutting all fuel subsidies in 2009, said Anggito Abimanyu, the finance ministry's chief of fiscal policy, according to the Jakarta Post.

With lower prices, the subsidies may be removed with the understanding that assistance may be warranted if fuel costs cross a certain predetermined level, Anggito said.

"If prices go up, we will cap them to a maximum ceiling, but we have not determined the benchmark prices yet," he said in the report.

The Indonesian sovereign bonds due 2018 were quoted at 64 bid.

Russia pressures emerging Europe

Emerging European traders sat through a day of light flows and illiquidity.

"It's tough to get anything done," a trader said.

With the holidays coming up, "we're just trying to get through to the end of the year," he said.

In Russia, the amount of foreign exchange and precious metal reserves became enough of a concern for finance minister Alexei Kudrin to make an attempt to assuage lawmakers' fears.

"With due account of the experience of the default and devaluation in 1998, we can say that amount of gold and foreign exchange reserves, which Russia has saved up over the recent years, makes it possible to say that a lasting foundation for stable macroeconomics and the national currency rate has been created," Kudrin told parliament, according to the Itar-Tass News Agency.

The problems that Kudrin denied are "a growing theme with what's happening with the currency," the trader said.

"It's happened before," he said about ruble devaluation leading to default.

The ruble was seen trading at 27.617 to the dollar.

The Russian government bonds due 2030 were spotted at 80 bid, 80.5 offered.

Meanwhile, even though Russia is a major influence on the emerging European category, there is little downside left for its neighbors.

"They've all got their own problems," the trader said.

"Kazakhstan already had its story, Ukraine is too associated with Russia and is pretty bad already," he said.

In Kazakhstan, president Nursultan Nazarbayev spoke with president-elect Barack Obama about regional issues in a telephone conversation on Wednesday, Itar-Tass reported.

"We discussed in detail the problems of our region, security problems, Iran, Iraq, Afghanistan, Central Asia, relations with Russia, as well as the relations between Kazakhstan and the United States in the sphere of energy, politics et cetera," Nazarbayev said in the report.

The conversation was reportedly friendly and productive, according to Nazarbayev's office.

"I think this is a good signal," Nazarbayev said.

Turkey spreads hold on rate cut

In Turkey, prime minister Recep Tayyip Erdogan downplayed the affects of the global financial crisis on Turkey but admitted the country may face greater hardships in the first half of 2009.

Erdogan has been insistent that Turkey is prepared to weather the storm, but the Hurriyet Daily News reported that he has meetings scheduled with his economic advisors.

Still, before the meeting Erdogan seemed to favor a hands-off approach to the economy.

"Nobody should expect everything from the government," he said in the report.

"It's not like, the government is going to inject cash into the emptied safes of companies," he said.

He also opposed a rate cut from the central bank, but the bank surprised investors with a cut of 50 bps from the overnight borrowing rate and 100 bps from the lending rate.

The overnight borrowing rate now stands at 16.25% while the overnight lending rate was lowered to 18.75%.

Despite, the unexpected cut and cavalier attitude from Erdogan, "Turkey looks like it's holding," the trader said during London's afternoon.

"Five-year protection is holding quite well" and was one of the only issues trading on Wednesday, he said.

Its recent success "doesn't mean it can't spike by a few hundred basis points," the trader added.

The Turkish five-year CDS was seen trading at 555 bps bid, 570 bps offered.

The Turkish sovereign bonds due 2030 were quoted at 123 bid, 125 offered.

LatAm sinks on selling

"There is movement out there, but it's not the flow that you traditionally see," a strategist said.

"Portfolio movements and redemptions continue in the market," which has been characterized by "sharp and drastic moves," he said.

"People are just looking for liquidation," he said.

Even Brazil's traditionally stable bonds due 2040 saw "significant widening" as "some redemptions were taking place," he said.

The 11% Brazilian bonds due 2040 were seen at 112.75 bid, 113.25 offered.

Meanwhile, "some credits like Argentina are better bid," he said.

The central bank continued to act on behalf of the market which encouraged investors.

"They are buying paper ... trying to support their market," he said. "It's nothing new."

The 8.28% Argentine discount bonds due 2033 were seen 0.25 point lower at 26 bid, 27 offered.

Also in Latin America, Venezuela continued to feel the pressure of a possible Ecuador default and quickly sinking oil prices.

Light sweet crude was seen trading as low as $53 per barrel.

The 9¼% Venezuelan sovereign bonds due 2027 were seen at 67.75 bid, 68.5 offered.

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