EMERGING MARKETS-Sell-off resumes despite central banks' support
By Walter Brandimarte and Sujata Rao RIO DE JANEIRO/LONDON, Jan 31 (Reuters) - Investors resumed their flight from emerging markets on Friday as the latest round of central bank actions proved insufficient to offset concern about rising economic and political risks in many developing countries. Currencies, stocks and bonds fell in developing nations, from Asia to Europe to Latin America, with the Russian rouble sliding 1 percent to five-year lows. The turmoil also appeared to engulf central European countries such as Poland and Hungary, which fared relatively well in the first sell-off phase earlier this month. "We are in a negative feedback loop of weak currencies, higher interest rates, weak growth and capital outflows," said David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch. "This feedback loop needs to play out and that means at the end of the day emerging market assets need to become much cheaper. Only then will people come back to buy." Political tensions were also growing, with India accusing the United States of not being mindful of the impact of its policies on the rest of the world and the International Monetary Fund urging central banks to remain vigilant over liquidity conditions. Still, analysts said tighter global liquidity resulting from the U.S. Federal Reserve's decision to cut back on stimulus only exacerbates emerging markets' own problems, which include unsustainable current account deficits, rising political risks and a possible economic slowdown in China. "What's driving this is the fear of a Chinese slowdown and what I want to see is some kind of policy action from the People's Bank of China," said Lars Christensen, chief emerging markets analyst at Danske Bank. SPILLOVER INTO CENTRAL EUROPE In a sign that the turmoil was reverberating in central Europe, Poland delayed publication of its monthly debt supply plan until next week due to market turbulence and an overhaul of its pension scheme. On Thursday, Hungary was forced to cut a T-bill auction because of a 67 basis-point jump in yields. Hungary's central bank was the latest to wade in with assurances that it would act to soothe markets if needed, adding to verbal intervention from India and Russia, as well as big rate rises in Turkey and South Africa. The Hungarian forint fell 1.5 percent to the euro, hitting two-year lows, while bond yields jumped 20 basis points across the curve. "Fears are growing that, if the central bank cannot stop the forint's fall in any other way, this will lead to an interest rate hike in the end," a bond trader in Budapest said. In neighboring Poland, 10-year bond yields rose 10 basis points to a 4-1/2 month high after the government delayed its debt supply plan and the zloty lost 1 percent. The spotlight remained on the rouble. A rally that started late on Thursday proved short-lived, taking the Russian currency down more than 1 percent. Analysts said the central bank's plans for "unlimited interventions" should the rouble stray outside a target band had squeezed out short rouble positions on Thursday, but the broad trend for flight was very much intact. The Turkish lira and the rand fell almost 1 percent and South African domestic bond yields hit the highest since mid-2011, as markets priced in more interest rate rises in coming months. BRAZIL MISSES BUDGET TARGET In Latin America, the Chilean peso slid more than 1 percent while the Brazilian real and the Mexican peso posted more modest losses of 0.5 and 0.3 percent, respectively. The real dropped even as the central bank offered as much as $2.3 billion through repurchase agreements to roll over expiring dollar lines and maintain liquidity in the currency market. Underscoring investor concern about Brazil's deteriorating economic fundamentals, central bank data showed that the country posted its weakest fiscal performance in more than a decade in 2013, falling far short of its primary surplus goal for the year. Despite the recent round of monetary tightening in some emerging market countries, Mexico's central bank held its benchmark interest rate unchanged at a record low 3.5 percent. In equity markets, MSCI's main emerging markets index traded just off 4-1/2 month lows and was on track for its biggest monthly loss since mid-2012. The Latin American portion of the index dropped 0.6 percent. Domestic emerging bond yields have risen around 40 basis points since the start of January and sovereign dollar bond yields have jumped about 50 bps this month on JPMorgan indices. Key Latin American stock indexes and currencies at 1530 GMT Stock indexes daily % YTD % Latest change change MSCI LatAm 2,858.39 -1.01 -9.79 Brazil Bovespa 47,065.75 -0.38 -8.62 Mexico IPC 40,691.03 -0.77 -4.77 Chile IPSA 3,370.89 -0.6 -8.87 Chile IGPA 16,852.17 -0.51 -7.54 Argentina MerVal 5,904.55 0.79 9.53 Colombia IGBC 11,911.31 -0.40 -8.87 Peru IGRA 15,509.62 -0.26 -1.55 Venezuela IBC 2,829.54 1.11 3.40 Currencies daily % YTD % change change Latest Brazil real 2.4258 -0.49 -2.84 Mexico peso 13.4120 -0.33 -2.85 Chile peso 555.9000 -1.58 -5.36 Colombia peso 2023.5000 -0.60 -4.52 Peru sol 2.8210 -0.14 -0.99 Argentina peso 8.0150 0.00 -19.00 Argentina peso 12.5000 1.20 -20.00
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