EMERGING MARKETS-Brazil real gains on budget goal, Ukraine debt insurance costlier

Thu Feb 20, 2014 12:42pm EST

* Investors encouraged by Brazil's budget savings goal
    * Chinese stocks fall after factory PMI hits 7-month low
    * Ukrainian debt insurance costs highest since Dec 2009


    By Walter Brandimarte and Carolyn Cohn
    NEW YORK/LONDON, Feb 20 (Reuters) - The Brazilian real
gained 1 percent on Thursday after the country set a more modest
and possibly more realistic fiscal savings target for 2014,
while Ukraine's debt insurance costs rose to their highest since
December 2009 on escalating conflict.
    Chinese equities  dropped from two-month
highs reached earlier on Thursday after a index of manufacturing
activity shrank to a seven-month low. In Latin America, however,
a fall in stock prices was cushioned by data showing U.S.
manufacturing activity accelerated in February at its fastest
pace in nearly four years.  
    Worries about a slowdown in the Chinese economy have
contributed to a sharp sell-off in emerging markets in recent
months as investors eye the economic prospects of countries such
as Brazil and Chile, which are big commodities exporters to
China.
    "The story of China remains one of very sluggish growth,"
said Luis Costa, emerging markets strategist at Citi. "It does
not bode well in an environment where emerging market FX is
already trading nervously."
    In Brazil, however, the real gained as much as 1.05
percent as investors received with cautious optimism the
announcement that the government of President Dilma Rousseff
intends to deliver a primary fiscal surplus of 1.9 percent of
gross domestic product this year. 
    Brazil failed to achieve its budget savings targets of 3.1
percent of GDP in 2012 and of 2.3 percent of GDP in 2013,
raising the threat of a sovereign rating downgrade from Standard
& Poor's in the next few months. 
    This year's target, albeit lower than in previous years,
could be a positive step if the government sticks to it despite
strong spending pressures stemming from Rousseff's re-election
campaign.
    "Today's overall announcement was positive, in terms of the
breakdown of cuts as well as projected revenues," Credit Suisse
analysts wrote in a research note. "We believe the
reestablishment of the confidence around fiscal policy
management, however, still depends on a consistent flow of
monthly results ahead."
    In Mexico, the peso edged 0.4 percent higher as
investors were encouraged by the strong manufacturing data in
the United States, Mexico's main trading partner.

    UKRAINE TENSIONS RISING    
    Ukraine's five-year credit default swaps rose 59 basis
points to 1,384 bps, according to Markit, after at least 21
people were killed on Thursday in Kiev, shattering an overnight
truce and bringing the death toll above 50. 
    But Ukrainian dollar bonds steadied after sharp drops in the
previous session on the violent conflict between President
Viktor Yanukovich's government and anti-government protesters. 
    Three European Union foreign ministers flew out of Kiev on
Thursday without seeing Yanukovich, but three others were
meeting the president, diplomats said. 
 
    Ukraine's June 2014 dollar bond gained 1.2
points to 94.1, according to Tradeweb, while the 2017 bond rose
1.6 points to 84.1, according to Reuters data.
    Traders said prices were marked down, rather than sold off
heavily, in the previous session. Some bonds are also thought to
still be in the hands of large U.S. investors like Franklin
Templeton, which held large portions of several issues according
to end-December filings.
    "I believe there has been some reshuffling but the biggest
strategic positions are still there," said Costa.
    The hryvnia spot rate hit fresh five-year lows, 
and forward rates were implying a 17.5 percent depreciation in a
year's time. 
    Investors are watching the fallout from Ukraine to
neighbouring economies such as Poland and Russia.
    The rouble approached the previous day's five-year
lows against the dollar.
    "The rouble has been caught by the EM currency sell-off,"
said Joseph Dayan, London-based managing director for Russian
broker BCS Financial Group. "Ukraine is another unfortunate
factor weighing in."
    Most emerging European and African currencies were steady to
softer, after falling in Wednesday as the Ukraine crisis seeped
into other markets.
    The Nigerian naira hit a record low of 169 to the
dollar before trading stopped after President Goodluck Jonathan
suspended Central Bank Governor Lamido Sanusi, an increasingly
outspoken critic of the government's record on tackling rampant
corruption.
    Nigerian stocks fell 1.4 percent and are the
worst-performing in the MSCI frontiers index this year, after
stellar gains last year. 
    Sanusi, who was due to end his term in June, had been
presenting evidence to parliament which he said showed the state
oil company had failed to remit around $20 billion that it owed
to federal government coffers. Sanusi said he would challenge
the decision. 
    "We investors do not like abrupt moves," said Citi's Costa.
"This is obviously negative news."
    Jonathan named managing director of Zenith Bank Godwin
Emefiele as the next central bank governor, but he was not to 
start until June. 
    
    Key Latin American stock indexes and currencies at 1715 GMT
    
     Stock indexes                    daily %    YTD %
                      Latest          change     change
 MSCI Emerging        950.53          -0.89      -4.35
 Markets                                         
 MSCI LatAm           2932.62         0.25       -8.61
                                                 
 Brazil Bovespa       47406.27        0.54       -7.96
                                                 
 Mexico IPC           39775.67        -0.58      -6.91
                                                 
 Chile IPSA           3637            -0.12      -1.68
                                                 
 Chile IGPA           17964.08        -0.07      -1.44
                                                 
 Argentina MerVal     5992.66         0.6        11.16
                                                 
 Colombia IGBC        12479.19        -1.08      -4.53
                                                 
 Peru IGRA            15470.82        0.34       -1.80
                                                 
 Venezuela IBC        2759.98         0          0.86
                                                 
                                                 
 Currencies                           daily %    YTD %
                            Latest    change     change
 Brazil real          2.3710          0.75       -0.60
                                                 
 Mexico peso          13.2827         0.39       -1.90
                                                 
 Chile peso           555.4           -0.54      -5.28
                                                 
 Colombia peso        2045.6          0.15       -5.55
                                                 
 Peru sol             2.808           0.00       -0.53
                                                 
 Argentina peso       7.8125          -0.38      -16.90

 Argentina peso       11.85           -0.42      -15.61
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