EMERGING MARKETS-Turkish lira recovers, Brazil real drops as rout continues

Mon Jan 27, 2014 4:06pm EST

(Updates with Latin American markets close)
    By Sujata Rao and Walter Brandimarte
    LONDON/RIO DE JANEIRO, Jan 27 (Reuters) - The Turkish lira
rebounded on Monday after the central bank called an emergency
meeting, but Brazil's real slumped to a five-month low on fears
the selloff in emerging markets could spread, potentially
derailing the global economic recovery.
    Foreign exchange and equity markets in developing economies
suffered a third straight session of bulk selling, although some
key currencies, such as the Mexican peso, partly recovered.
    After a stormy week during which Argentina's peso posted its
biggest one-day loss in 12 years, sparking worries of contagion
across emerging markets, investors monitored developments in
Argentina and other fragile developing economies, such as
Turkey.
    While the official exchange rate in Argentina 
steadied around 8 pesos per dollar on Monday, the peso slid
nearly 3 percent on the black market to over 12 per
dollar. 
    The Argentine peso's plunge last week revived memories of
the country's 2002 debt default and financial crisis, which sent
ripples across emerging and developed markets alike. 
    Analysts believe any financial contagion from Argentina
would be more limited this time, but there could be economic
fallout for countries with strong trade ties to Buenos Aires,
including regional powerhouse Brazil.
    The financial turmoil in Argentina could, however, be a
catalyst for growing risk aversion at a time when investors are
already jittery about tapering monetary stimulus from the
world's major central banks and slower economic growth in China.
    Disorderly capital flight from emerging markets could hurt
the economic prospects of developing countries, which have been
the engine of global growth during the past decade.
    "Outflows from emerging market forex markets by the investor
community are gaining traction and becoming more widespread,"
Citi strategist Lam Kenneth wrote. "Absent positive emerging
market catalysts, the current flow pattern is likely to continue
and could even exacerbate in certain countries."
    As concerns mount about the prospects for emerging markets,
investors are increasingly differentiating between countries
with stronger economic underpinnings and political stability,
while abandoning or betting against those whose current account
balances and government budgets are deeply in the red and where
there is political turmoil. 
    But when panic sets in, investors tend to sell all emerging
markets indiscriminately, ignoring the progress made by many of
those countries in accumulating foreign reserves or reducing
their dollar-denominated debt. 
    
    LIRA RECOVERS
    The Turkish lira edged back from a record low of
2.39 per dollar after the central bank announced an emergency
policy meeting for Tuesday, the first since August 2011, at the
height of the euro zone debt crisis. 
    The announcement raised market hopes that Turkish
policymakers would ignore political pressure and hike interest
rates aggressively to support the currency. It drove the lira
1.9 percent higher from Friday's close, to 2.2895.
    In Brazil, however, the real tumbled to 2.4240 per
dollar mark, its weakest level since Aug. 22, when the central
bank announced a daily intervention program aimed at smoothing
out the currency's weakening trend.
    Despite continued intervention by the Brazilian central
bank, the real weakened 13 percent in 2013 and an additional 2.7
percent so far this year as investors fret about the
deterioration of the country's fiscal and economic fundamentals.
    "No one knows what fiscal policy (in Brazil) will be in
2014. So until the primary surplus target is set and details are
released on how it will be achieved, we will continue to face
uncertainty," said Gustavo Mendonça, economist with Saga Capital
in Rio de Janeiro.
    Some Latin American currencies, such as the Mexican peso
 and the Chilean peso, were trading slightly
stronger, interrupting a string of losses. But other key
emerging market currencies, including the South African rand
 and Russian ruble, traded near five-year lows.
    The ruble fell almost 1 percent to overshoot the central
bank's floating corridor along its euro-dollar basket for the
first time ever. 
    While global factors are weighing on Russian assets, the
depreciation is also due to the central bank's recent resolve to
reduce interventions ahead of the ruble float and inflation
targeting in 2015.
    As in Turkey, where the market is testing the central bank's
resolve to keep interest rates low, the ruble's recent moves may
raise doubts about Russia's currency policy.
    Authorities continued to try and support their currencies,
with the Indonesian, Russian and Serbian central banks among
those spotted selling hard currency. In Brazil, the central bank
sold currency swaps, derivatives that provide investors with
protection against a weaker real.
    Earlier in the day, the Malaysian ringgit and
Philippines peso currencies also traded at their lowest
in more than three years.

    SPILLOVER INTO STOCKS
    Equity markets across the developing world also fell, with
the benchmark MSCI emerging markets index down 1.8
percent to new 4-1/2-month lows and its biggest one-day loss
since August.
    "We are seeing quite a lot of negative spillover into
equities. There is more scope for dollar buying and emerging
market forex losses," said Luis Costa, head of CEEMEA strategy
at Citi.
    Latin America's portion of the MSCI index 
posted a more modest decline, as gains in banking shares
cushioned the fall of Brazil's benchmark Bovespa index.
        
    Key Latin American stock indexes and currencies at 2020 GMT:
  
     Stock indexes    Latest      Daily     YTD pct
                                  pct       change
                                  change    
 MSCI LatAm          2,908.92     -0.27     -8.87
                                            
 Brazil Bovespa      47,701.05    -0.18     -7.39
                                            
 Mexico IPC          40,948.78    -0.08     -4.16
                                            
 Chile IPSA           3,522.99    -2.08     -4.76
                                            
 Chile IGPA          17,497.52    -1.78     -4.00
                                            
 Argentina MerVal     5,605.35     1.08      3.98
                                            
 Colombia IGBC       12,075.00    -1.01     -7.62
                                            
 Peru IGRA           15,689.84    -2.28     -0.41
                                            
 Venezuela IBC        2,821.40     0.5       3.10
                                            
 
 Currencies                          Daily pct     YTD
                                        change     pct
                            Latest              change
 Brazil real                2.4223       -1.03   -2.70
                                                
 Mexico peso               13.3430        0.85   -2.35
                                                
 Chile peso               549.5000        0.18   -4.26
                                                
 Colombia peso          2,008.8000       -0.74   -3.82
                                                
 Peru sol                   2.8230       -0.04   -1.06
                                                
 Argentina peso             8.0000        0.06  -18.84
 (interbank)                                    
                                                
 Argentina peso            12.0500       -2.90  -17.01
 (parallel)                                     
                                                
            
 

 (Additional reporting by Asher Levine in Sao Paulo and Carolyn
Cohn in London; editing by Todd Benson, Dan Grebler, G Crosse)
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