EMERGING MARKETS-Ukraine, Thai assets rattled by political turmoil

LONDON Mon Dec 2, 2013 5:32am EST

LONDON Dec 2 (Reuters) - Ukraine's debt insurance costs surged almost 100 basis points on Monday and its dollar bonds tumbled as massive anti-government protests threatened to undermine the already troubled economy.

Political turmoil also weighed on Thai assets earlier in the day, with the baht trading at 12-week lows to the dollar.

Manufacturing data across the developing world was broadly positive, with Asian numbers at multi-month highs last month, Japan expanding at the fastest pace in seven years and emerging Europe showing continued signs of recovery.

But investor focus was on Thailand and Ukraine, with Ukraine's dollar bonds falling 1.0-2.0 points in price across the curve, with the 2020 issue hitting two-month lows .

The Ukrainian central bank stepped in to sell dollars to defend the hryvnia which is trading near four-year lows to the dollar, while five-year credit default swaps surged almost 100 bps to 1067 bps, according to Markit.

"The problem is that (political turmoil is happening precisely at the moment when the country is facing major, major economic challenges," said Regis Chatelier, global sovereign strategist at Societe Generale.

"You can always predict inflation or growth, those kinds of things, but what happens politically on the ground can evolve so quickly."

About 1,000 protesters blocked off the Ukrainian government's main headquarters on Monday and surrounding streets, preventing employees getting to work, in further protests at Kiev's policy U-turn away from integration with Europe And back towards Russia.

On Sunday, Ukrainian opposition leaders called on for President Viktor Yanukovich and his government to resign at a huge pro-Europe rally of about 350,000 people - the biggest demonstration since the so-called Orange Revolution nine years ago.

Fears are growing that the country, already stuck in recession with a large current account gap and dwindling central bank reserves, could be forced to default on debt if it fails to reach a deal with either Europe or Russia.

Fears are also growing the country will not be able to prevent a currency devaluation, as the six-month non-deliverable forward rate spiked almost 1 percent to 8.95 per dollar, implying roughly an 8 percent fall in the hryvnia's value . NDFs price hryvnia at 9.6 in a year.

Political turmoil also rocked Thailand where the baht fell to 12-week lows against the dollar, with many suspecting central bank intervention. Thai stocks fell 1 percent

On Sunday, three people were killed in street clashes in Bangkok, as police fired tear gas and grenades for the second day outside the prime minister's compound.

Analysts have slashed expectations for Thai growth to 3 percent this year and the central bank cut interest rates last week, citing weak growth. Fund managers said however fears of large-scale outflows were misplaced, though a rush to hedge exposure was putting pressure on the baht exchange rate.

"There hasn't been a large portfolio outflow from Thailand. There has been currency hedging, and that's typically what investors do when they are concerned about the short term effect on markets," said Mirza Baig, head of currency and rates research at BNP Paribas in Singapore.

Dollar/baht forward rates jumped, indicating investors were buying dollar forwards.

One-month implied baht volatility hit 6 percent, the highest in six weeks.

Broader emerging markets were lacklustre, with Chinese mainland stocks ending down 0.8 percent, shedding early gains triggered by steady factory expansion in the world's No. 2 economy.

In emerging Europe, the biggest equity gainer was Athens, which re-entered the emerging equity index last week. The market rose 1 percent to the highest since August 2011 after the purchasing managers index (PMI) hit a four-year high and returned to growth after a four-year gap.

MSCI's emerging markets index was flat, weighed down by the Chinese weakness.

Regional PMIs in general were robust, with Polish output expanding for the seventh month in a row and Czech numbers beating forecasts. Turkish manufacturing climbed to 32-month highs.

But Hungarian forint fell to nearly three-month lows to the euro as PMIs eased. That will encourage expectations that the central bank will continue to cut interest rates.

The rouble too weakened against the dollar and its euro-dollar basket , standing just off 2-1/2 month lows to the dollar and four-year lows to the basket. The currency is being undermined by slowing growth and PMI data on Monday confirmed the slowdown

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