CORRECTED-EMERGING MARKETS-Stocks edge off 9-mth lows, Turkey makes gains

Wed Jun 12, 2013 9:41am EDT

(Corrects to show Russian markets closed on Wednesday; prices are for Tuesday's close)

By Philip Baillie and Carolyn Cohn

LONDON, June 12 (Reuters) - Emerging equities hit 9-month lows for a second day on Wednesday on a continuing flight from high-yield assets before recouping some losses, bolstered by a slight recovery in Turkey and Russia.

Emerging market assets have been hard-hit by expectations the U.S. Federal Reserve will scale back quantitative easing, encouraging money to return home to the United States, and by lower growth in key commodity export market China.

The MSCI emerging markets index hit its lowest since June 2012 early in the European trading session, before trimming losses to trade 0.35 percent higher on the day.

Turkish markets stabilised slightly, gaining 2.2 percent after a recent sharp sell-off sparked by violent protests that have tested Prime Minister Tayyip Erdogan's position and dented stocks by more than 20 percent since May 31.

"We have been very bearish (on emerging markets). Indeed, we couldn't find a single market we wanted in the emerging market space, we would rather have cash," said John-Paul Smith, global emerging equities strategist at Deutsche.

"Ironically, the slowdown in China means U.S. bond yields will be capped around this 2.2 percent level so our current scare will probably blow over."

Emerging sovereign debt spreads tightened 3 basis points to 347 bps over U.S. Treasuries, after gapping out 20 bps in the previous session, and widening more than 50 bps in the past few weeks.

The cost of insuring Turkish debt against default in the five-year credit default swap market eased from recent 10-month highs, dropping 6 basis points to 177 bps, according to Markit.

The lira rose to its highest since May 31, rebounding after hitting end-2011 lows on Tuesday, partly buoyed by signs from the central bank that it would not permit the currency to weaken indefinitely.

Central bank Governor Erdem Basci said around $8 billion had fled Turkish markets since the start of May and while the bank would discuss an increase in the upper band of the interest rate corridor at its meeting next week, he said he saw no need for such a move at present.

Russian stocks closed down 0.66 percent on Tuesday, hitting one-year lows.

CURRENCIES, FRONTIERS

The Indian rupee gained 0.7 percent, edging away from an all-time low against the dollar, as India confirmed the central bank stepped in to stabilise the currency on Tuesday.

The rupee and Indian bonds got a further boost after Fitch upgraded India's outlook to stable on its BBB- rating.

In central Europe, currencies were broadly firmer, with the zloty rising 0.6 percent and inching further off the 11-month lows it hit last week against the euro.

The forint firmed 0.4 percent off the previous session's six-week lows. Budapest markets were awaiting minutes of the latest central bank meeting for clues about further monetary easing.

Frontier markets Dubai, Abu Dhabi and Qatar soared after MSCI said it would add United Arab Emirates and Qatar to its emerging shares benchmark index in May 2014 and would downgrade Greece from developed market status.

Abu Dhabi and Qatar stocks hit their highest since September 2008, shortly after the collapse of Lehman Brothers, and Dubai stocks rose 1.5 percent.

(Additional reporting by Sujata Rao, Editing by Stephen Nisbet/Ruth Pitchford)

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