EMERGING MARKETS WEEK-Volatile trade and interest rate cuts seen

Sun Dec 14, 2008 2:15pm EST
By Daniel Bases
NEW YORK, Dec 14 (Reuters) - Emerging markets face a drop in trade activity with a focus on Washington and Detroit to see if the Bush administration bails out the U.S. automakers and if the U.S. uses unconventional monetary easing policies to keep money flowing in the financial system.
In the last full week of trading for the year before the Christmas and New Year holidays set in, price action across all asset classes is expected to be volatile.
Emerging markets will continue to be driven by risk sentiment from outside the sector. In the spotlight now is the U.S. auto industry.
The survival of the U.S. auto industry, which is a worldwide employer and consumer of raw materials, hangs in the balance.
The U.S. Senate rejected a $14 billion bailout plan for General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz), Chrysler [CBS.UL] and Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz). The White House said last week it would consider tapping the $700 billion Wall Street bailout fund (TARP) to help keep them afloat, but a White House spokesman said a decision was unlikely before President Bush returns from Iraq.
"Look at the week through the prism of liquidity. It is draining and will become more so next week. We need to see some action on the TARP and the automakers, otherwise you'll have risk aversion creep back into the market capping whatever momentum the market may gain off this Christmas window-dressing effect," said Enrique Alvarez, head of Latin America debt strategy at IDEAglobal in New York.
With two weeks left in the year, the likelihood of any rallies has dimmed as the economic outlook for developed economies grows grimmer with each passing economic report.
Emerging markets will provide 100 percent of next year's global growth but diminished activity, lack of available cash and a coming financing crunch in these riskier sectors makes 2009 tough to greet with enthusiasm.
Year-to-date the JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS, a benchmark measure of sovereign debt risk, is down 14.978 percent while the MSCI emerging markets stock index is down 55 percent .MSCIEF.
"With the liquidity situation already bad in most FX markets in the region, we expect liquidity to more or less dry up next week as investors try to close down positions before the Christmas holidays. This brings with it a risk of increased volatility and 'weird' moves in the EMEA markets next week," Danske Bank wrote its clients.