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Emerging Markets-LatAm assets melt on fears of sharp recession
By Walter Brandimarte
NEW YORK, Oct 6 - Latin American stocks, currencies and bonds melted down on Monday as panicked investors fled to the relative safety of dollar-denominated assets, fearing a snowballing financial crisis is likely to result in a sharp global recession.
Stock trading was twice halted in Brazil as the Bovespa index <.BVSP> collapsed as much as 15.5 percent. It cut part of its losses later after the Brazilian government said it will tap its foreign reserves to finance exporters.
Russia's and Peru's stock exchanges also had trading temporarily suspended.
Latin American currencies, which had been largely supported by dollars flowing from commodity exports, sank to multi-year lows on fears that a global recession may further reduce the price of raw materials. U.S. crude oil prices <CLc1> closed at an eight-month low of $87.14 per barrel.
Bonds were also hammered as investors rushed to the relative safety of U.S. Treasuries, prompting yield spreads between the two asset classes to widen to levels not seen in more than four years.
"It's a bloody meltdown," said Hari Hariharan, chairman of NWI management, a New York-based fund that manages about $1 billion in emerging market debt.
"Paper profits are getting obliterated. There are so many concerns about ability of policy makers to respond (to the crisis) that honestly there's nothing really intelligent to say. This is a melt, you just have to wait and see."
The MSCI Latin America stock index <.MILA00000PUS> plunged 11.5 percent while the broader MSCI index for emerging equity markets <.MSCIEF> lost 9.6 percent. In New York, the Dow industrials <.DJI> ended below 10,000 points for the first time in four years.
The Brazilian Bovespa <.BVSP> and the Mexican IPC <.MXX> stock indexes both closed 5.4 percent lower, while Argentina's MerVal <.MERV> lost 5.9 percent and Peru's IGRA <.IGRA> plummeted 9.3 percent.
In Brazil "we're suffering because commodities have a heavy weight on the Bovespa," said Pedro Galdi, an analyst with the Sao Paulo-based SLW brokerage.
In a report that forecasted a global recession for 2009, local brokerage UBS Pactual reduced its price target for stocks of Brazilian miners and steel makers.
In Russia, the rouble-denominated MICEX stock index <.MCX> closed down 18.7 percent -- its worst performance since a 20.8 percent slump in October 1997.
PROVIDING LIQUIDITY
Latin American foreign exchange markets sank as investors favored dollar positions, causing dollar financing for companies in the region to virtually dry up.
In a bid to restore liquidity to markets, Brazilian authorities announced measures to guarantee credit lines to exporters, including the use of the country's foreign reserves to buy bonds issued by Brazilian banks abroad, with a repurchase agreement.
By providing those banks with dollars, the government expects them to keep financing domestic companies that need foreign-currency financing.
The Brazilian central bank also sold dollar swaps on the foreign exchange market for the first time in more than two years, but that did not stop the real <BRBY> from slumping 7.0 percent, its largest one-day loss in more than six years.
The Peruvian central bank also sold dollars from its foreign reserves on the domestic market to curb the depreciation of the sol <PEN=PE>, but the currency still closed more than 2.0 percent lower.
The Mexican peso <MXN=> fell 6.43 percent to its weakest level since the government ended currency controls in late 1994. The Argentine peso lost 2 percent in trade between foreign exchange houses, its biggest one-day loss since November 2003.
But nothing compared to the meltdown of the Iceland currency. The crown plunged 30 percent against the euro <EURISK=D3> as the country's banking system faltered and officials drafted emergency legislation aimed at avoiding a financial chaos.
The JPMorgan EMBI+ index <11EMJ>, a key gauge of investors' aversion to risk, showed emerging debt spreads over U.S. Treasuries widening 51 basis points to 488 basis points, their widest level since July 2004. (Additional reporting by Manuela Badawy in New York, Aluisio Alves in Sao Paulo)
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