Emerging markets snapped higher on Friday in the wake of a better-than-expected US jobs report, but prices slipped back as the day drew on as markets retrenched in quiet trade after the employment euphoria. Spreads narrowed between emerging market sovereign bonds and US Treasuries, with the benchmark J.P. Morgan Emerging Markets Bond Index Plus tightening by 7 basis points to 306 basis points.
The move, however, was due primarily to a steeper decline in US Treasuries as prices across the emerging markets spectrum were also mostly weaker. Treasuries dropped sharply after the US reported employers cut far fewer jobs than expected last month in the best showing for the labour market since the recession began. MSCI's Latin American stock index fell 1.64 percent, after touching a 16-month high in the initial rush to buy after the US jobs report. MSCI's broader emerging markets stock index fell by a more modest 0.47 percent.
Venezuelan credits made back some ground on Friday as fears over the health of the country's financial system eased. Markets were calmed after President Hugo Chavez softened his rhetoric to vow "wise" action in the sector. Venezuela's 2027 Global bond was up 0.75 point in price to bid 67, yielding 14.448 percent.
The yield has shot up 183.2 basis point since November 25 according to Reuters data, with more than half of the move coming this week alone. The Chavez government this week took over a total of seven banks, with talk of reopening some of them to operate under government control. The timing of any bank reopening is not known.
Most analysts believe the Chavez government is engaged in a "clean-up" exercise of a minority of banks with solvency, capital or ownership problems, rather than being on the brink of taking over another sector in the economy. The US dollar surged higher, putting downward pressure on Latin American currencies.
Commodity prices also fell sharply on the stronger dollar, another factor undermining emerging markets, many of which rely heavily on commodity exports. In the currency markets, the Mexican peso weakened 0.39 percent to 12.68 per US dollar. Moody's Investors Service said on Friday it has a stronger bias toward downgrading Mexico's credit rating than raising it.
The Brazilian real fell 1.10 percent to 1.7280 per US dollar. The real has rallied this year as investors poured cash into the economy, which rebounded quickly from the global economic crisis. The Colombian peso dropped 0.76 percent to 2,006.25 against the greenback. Gold fell back from its record high, dropping $56.80 or $4.71 percent to $1,150.25 while the price of oil lost 1.3 percent, or $0.99, to settle at $75.47 per barrel.