GLOBAL MARKETS-Selloff eases slightly but EM contagion fears linger

Fri Jan 31, 2014 1:57pm EST

* IMF urges global central bank coordination
    * Euro slides after inflation data
    * Commodities lower on stronger dollar, growth fears
    * Chinese New Year holiday closures curb activity


    By Rodrigo Campos
    NEW YORK, Jan 31 (Reuters) - Emerging market stocks and
currencies extended their slide on Friday on fears of a
protracted capital flight, while a gauge of global equities
fell, on track to close its worst month in almost two years.
    European and U.S. stock markets fell, cutting initial losses
sharply, but could not prevent MSCI's global index
 from heading to its largest monthly decline
since May 2012. Emerging market stocks were down 6.8
percent for the month, the worst start to a year since 2008.
    Adding to pressure in emerging market currencies from Turkey
to South Africa in previous sessions, the Russian rouble 
and Polish zloty slid against the U.S. dollar. Government
borrowing costs jumped across weaker economies despite local
policymakers' efforts to stanch the bleeding.
    Concern about growth in China and other emerging markets
triggered the selling in developing economies late last week,
with focus on countries with internal political and economic
issues, like Ukraine and Argentina.
    The U.S. Federal Reserve's decision this week to continue to
withdraw its monetary stimulus - one of the reasons for the flow
of cash into emerging markets in recent years - compounded the
problems in emerging economies.
    "Pressure has now returned to haunt the key emerging market
currencies whose central banks have so far raised the cost of
borrowing, but pressure valves are also now being tested
elsewhere," said Andrew Wilkinson, chief market analyst at
Interactive Brokers LLC in Greenwich, Connecticut.
    Major U.S. stock indexes came off their session lows, with
the S&P 500 trimming its losses by half, partly as short sellers
bought in after sharp declines in stock indexes.
    "I think the shorts are taking off some risk heading into
the weekend. It's been a decent couple of weeks for them and
they are adjusting their positions as this week (and) this month
come to an end," said JJ Kinahan, chief strategist at TD
Ameritrade in Chicago.
    The Dow Jones industrial average fell 70.65 points,
or 0.45 percent, at 15,777.96. The Standard & Poor's 500 Index
 was down 3.82 points, or 0.21 percent, at 1,790.37. The
Nasdaq Composite Index was down 6.01 points, or 0.15
percent, at 4,117.11. 
    The FTSEurofirst 300 index of top European shares
closed down 0.24 percent after dropping nearly 1.7 percent at
its session low.
    In a move seen directly pressuring the Fed and European
Central Bank, the International Monetary Fund urged central
banks to ensure that a financial market rout in the developing
world does not lead to an international funding crunch.
 
    "I have been saying that the U.S. should worry about the
effects of its policies on the rest of the world," Reserve Bank
of India Governor Raghuram Rajan said on Friday, a day after
slamming what he said was a breakdown in global monetary
coordination.
    Poland delayed publication of its monthly debt supply plan
until next week due to market turbulence and an overhaul of its
pension scheme, a day after Hungary scrapped a bond sale because
of a sudden spike in rates.
    
    
    
    EURO FALLS
    Euro zone consumer price inflation dropped in January,
bucking market expectations and putting downward pressure on the
single currency. Inflation slowed back to 0.7 percent, the same
level as when the ECB, which meets next Thursday, caught markets
off guard with a rate cut in November. Unemployment remained at
a record high. 
    The euro was last down 0.4 percent versus the U.S. dollar,
trading at $1.3505.
    "The focus on the euro is that we could see a policy
response from the ECB next week," said Shaun Osborne, chief
foreign exchange strategist at TD Securities in Toronto.
        
    MONEY FLOWING OUT OF EM
    Fund investors worldwide pulled $6.4 billion from emerging
market stock funds in the week ended January 29, marking their
biggest outflows since August 2011, data from a Bank of America
Merrill Lynch Global Research report showed. 
    The grab for safer assets meant the dollar had the
upper hand in the currency market, pressuring commodities
already weakened by the prospects of slower growth.
    U.S. Treasuries prices rose on month-end buying and a 
safety run, putting safe-haven bonds on track to notch their
strongest gains in 20 months.
    "The risk-off theme continues. You have money coming out of
equities and into Treasuries. It's also definitely helping with
month-end buying," said Justin Lederer, Treasury strategist at
Cantor Fitzgerald in New York.
    The benchmark 10-year U.S. Treasury note was up
6/32, the yield at 2.6712 percent.
    Gold was caught between the run to safety and the surge in
the greenback, and spot prices dipped 0.2 percent. The
precious metal was down more than 2 percent for the week but on
track to post its first monthly gain since last August. 
    Brent oil fell 1.0 percent and U.S. crude was
little changed. Copper fell 0.6 percent to set a monthly
drop of more than 4 percent, the largest since last June.
    "The absence of the Chinese market for the next week means
that we may see some further downside on commodities, especially
if we do see the dollar gaining ground," said Tim Radford, of
Sydney-based metals adviser Rivkin.
    Chinese markets were closed for the New Year holiday and
will remained closed into next week.
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