Emerging debt-Prices little changed despite equities rally
NEW YORK, Jan 28 (Reuters) - Emerging sovereign debt prices were flat on Monday despite a rally in U.S. and Latin American equity markets as bond investors kept to the sidelines at the beginning of a week crowded by key U.S. economic data.
The Morgan Stanley Capital International's stock index .MILA00000PUS for the region rose about 1.9 percent, on optimism that the U.S. Federal Reserve will reduce its base interest rate by half a percentage point on Wednesday, after a cut of 75 basis points last week.
Emerging sovereign bonds traded flat, reflecting U.S. recession fears and ongoing concerns about possible negative developments in core credit markets.
Yield spreads between emerging bonds and U.S. Treasuries, an important measure of risk aversion, widened 2 basis points to 278 basis points on the JP Morgan EMBI+ index 11EMJ.
Brazil's global bonds due 2040 BRAGLB40=RR, the most liquid emerging market paper, were bid at 134.125, unchanged from Friday's close.
"There is a lot of uncertainty. Everyone wants to keep risk light at this point," said Paul Biszko, senior emerging markets analyst with RBC Capital in Toronto.
He mentioned concerns about hedge fund losses in Europe and the release on Tuesday of fourth-quarter results by Countrywide Financial Corp CFC.N, which has been severely hit by the U.S. subprime crisis. Investors are particularly monitoring whether the acquisition of Countrywide by Bank of America (BAC.N) will play out.
Among several important U.S. reports this week are durable good orders and housing prices on Tuesday, fourth-quarter GDP on Wednesday, and nonfarm payroll numbers and the Institute for Supply Management's report, both on Friday.
"The data has still to confirm that we are in a recession. The average expectation for a recession (among economists) is 42 percent, so there is still a lot of room for adjustment there," said RBC's Biszko. He added that, in the very short-term, emerging markets should be stuck in "range-bound, sideways trading.
"But we still believe that the next major move will be lower. There is still a lot of deleveraging that has to take place," he said.
Foreign investors have already started reducing their exposure in emerging markets like Brazil, withdrawing some $1.8 billion from Brazilian equity and fixed-income markets so far in the year, according to data released by the central bank on Monday.
That compares with inflows of about $45 billion in those markets in 2007. (Editing by Dan Grebler)
