Emerging market debt came under intense pressure again Thursday, while developing country stocks traded in the U.S. closed flat following a highly volatile session.
The intervention of the governments of Brazil and Mexico to prop up the value of their falling currencies, and news that the International Monetary Fund is in discussions with a number of countries about possible loan packages, helped to pare the losses.
Both the Brazilian real and the Mexican peso, which have been pounded of late, benefited from central bank interventions. The peso closed in Mexico City at MXN13.3940, compared with Wednesday's close of MXN13.8550, while the real ended at BRL2.3050 to the dollar, markedly stronger than Wednesday's close at BRL2.3795.
With 10 minutes to go before the closing bell, ADRs pared losses from a session that featured several momentum reversals, as investors went into a buying frenzy.
The Bank of New York Emerging Markets American Depositary Receipt index closed up 0.02% at 174 points after hitting a low of 159 points earlier in the day. The Latin American ADR index climbed 0.93% and the Asian ADR index gained 0.23%.
The reversal tracked the U.S. market where the Dow Jones Industrial Average, in another roller-coaster session, closed up 2%, led by a big bounce in energy companies.
The exodus from emerging markets external debt, however, found no relief, as a combination of fear and deleveraging drove spreads sharply upward.
The spread on JPMorgan's Emerging Markets Bond Index Global Diversified increased by 31 basis pointsto 850 basis points over Treasurys, its widest this year.
"Equities underperformed external debt and credit default swaps earlier this year (following U.S. equities), so now it's somewhat of a catch-up," said Nick Chamie, head of emerging markets research for RBC Dominion Securities in Toronto.
"This global credit crisis is having a significant impact on global banking systems and capital flows, so this is much more than about equity valuations. It's about unwinding of a massive credit bubble that eventually raises the overall level of risk," he added.
In Central and Eastern Europe, where worries are mounting about current account deficits and large external debts in several countries, credit spreads were at all-time highs. Five-year credit-default swaps on Hungary were trading around 650 basis points, up more than 100 basis points on the day and 202 basis points on the week.
Pakistan, Ukraine, Belarus and Hungary are among the countries with which the IMF has said it's discussing potential loan packages.
The cost of insuring sovereign debt against default for five years rose across the board Thursday, regardless of the credit quality of the sovereign.
Brazil, the emerging markets' credit heavyweight, saw the cost of insuring its debt against default for five years jump 66 basis points to 610 basis points over Treasurys.
Even China, which sits on the world's largest foreign reserves cushion and is believed to be better shielded than other developing economies from the global financial crisis, saw its five-year CDS spread climb 23 basis points to 255 basis points over Treasurys, according to Markit.
"Right now fundamentals are put on the sidelines," said Roberto Sanchez-Dahl, who manages $600 million in emerging markets debt with Federated Investors. "It's all about technicals and the large liquidity needs that put pressure on prices. People are selling whatever they can, anticipating redemption and lower prices... it's like a vicious cycle."