EMERGING MARKETS-Stocks dip on China money market drain, Ukraine currency falls
By Asher Levine and Carolyn Cohn
RIO DE JANEIRO/LONDON Feb 18 (Reuters) - Emerging market stocks dipped on Tuesday, led by a drop in Chinese shares, while a fresh outbreak of violence drove Ukraine's currency towards five-year lows and weighed on its bond prices.
Chinese stocks fell around 0.8 percent as the central bank (PBOC) drained 48 billion yuan ($7.92 billion) from the country's money market after data at the weekend showed new loans surged to their highest in four years in January.
The outlook for the world's second-largest economy is key for exporters from emerging markets.
"The PBOC's decision to drain liquidity using repos is a reminder that the tightening bias remains in place and the desire to curb credit growth remains intact," Kit Juckes, strategist at Societe Generale, said in a client note.
"This should be seen as a commitment to allow the ongoing slow and steady slowdown of the Chinese economy to continue."
The MSCI emerging equities index dipped 0.25 percent after hitting 3-1/2 week highs in the previous session.
Emerging sovereign debt spreads tightened by 2 basis points to 373 bps over U.S. Treasuries.
Several thousand anti-government protesters clashed with police near Ukraine's parliament on Tuesday, torching a police truck and hurling stones in the worst street violence in the capital Kiev in more than three weeks.
The increasing unrest led Ukraine's 2023 dollar-denominated bond to reverse early gains, falling 1.780 point in price to bid 82.005. The bond had risen on Monday after Russia said it would buy a $2 billion bond from Ukraine by the end of the week.
Ukranian state and oil and gas company Naftogaz saw its September 2014 bond gain 0.8 points to bid to 89.75 .
Naftogaz has paid back part of its 2013 debt to Russia's Gazprom, a government source said on Tuesday. The debt which Naftogaz owes to the Russian energy firm has made investors nervous that it will default on its dollar bond. .
On international markets, the cost of annually insuring Ukranian debt over five years on Tuesday rose 25 basis points from Monday's close to 1,176 bps, according to Markit.
The country'ss volatile hryvnia currency fell 0.8 percent towards recent five-year lows as Ukrainian importers were allowed to buy dollars on the market again after controls imposed on them by the central bank expired.
Elsewhere in Europe, Turkey's lira weakened slightly against the dollar after the central bank kept interest rates on hold Tuesday, as expected.
"Reassuringly uneventful," wrote Capital Economics' William Jackson in a client note.
Turkey's central bank hiked rates sharply last month to help stabilise the lira after a widespread sell-off in emerging markets. The sell-off was triggered by the outlook for diminished U.S. monetary stimulus and a local political crisis.
"Given the recent volatility in the financial markets, it's tricky to predict future moves in Turkish interest rates," Jackson said. "But we think the country's large current account deficit and high level of short-term external debt mean it's more likely than not that the central bank will need to maintain tight monetary conditions."
Hungary's forint weakened 0.7 percent against the euro after the central bank surprised investors by cutting interest rates by a more-than-expected 15 basis points to a new low of 2.7 percent on Tuesday.
The forint's decline of about 4.3 percent against the euro this year is largely due to global economic factors but the central bank's interest rate cuts have also contributed, Hungarian Economy Minister Mihaly Varga said on Tuesday.
Many Latin American stocks retreated from recent three-week highs as investors took profits, though Brazil's Bovespa remained in the black, led by banking shares.
Brazil's real and Chile's peso both weakened slightly.
Chile's central bank meets later on Tuesday and is expected to cut interest rates by 25 basis points to 4.25 percent.
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