EMERGING MARKETS-Turkish assets fall on Iraq violence, rand weakens

LONDON, June 13 Fri Jun 13, 2014 5:48am EDT

LONDON, June 13 (Reuters) - Turkish markets fell on Friday on the escalating violence in neighbouring Iraq, while the rand weakened following an outlook downgrade for South Africa.

Sunni Islamist militants gained more ground in Iraq overnight, moving into two towns in the eastern province of Diyala, while U.S. President Barack Obama considered military strikes to halt their advance towards the capital Baghdad.

Turkey, which has been suffering from a large current account deficit, switched some of its export focus to Middle Eastern countries like Iraq following the euro zone debt crisis.

"Iraq has been one of Turkey's fastest-growing export markets - I don't think we can downplay the events in Iraq in the context of Turkey needing to cut the current account deficit," said Neil Shearing, head of emerging markets research at Capital Economics.

The lira fell 0.5 percent to a nine-day low and Turkish stocks also fell 0.5 percent, towards the previous day's two-week low.

Iraq's 2028 dollar bond has dropped five cents this week to 90.75 cents on the dollar and Iraqi spreads have widened 70 basis points to 462 bps over U.S. Treasuries .

The rand fell 0.75 percent, though remained within recent ranges, after Fitch cut South Africa's outlook to negative on its BBB rating, citing poor prospects for economic growth and rising public debt.

Standard & Poor's is due to give its review on South Africa's rating later on Friday.

Hit by a crippling strike in the platinum mines since January, South Africa's economy contracted 0.6 percent in the first three months of the year, the first quarterly output decline since a recession in 2009.

"Recent events have focused people's minds on South Africa's vulnerabilities," said Shearing.

The overall MSCI emerging equities index fell 0.4 percent, but was getting some support from China gains and was on course for a modest 0.6 percent rise this week.

Russian markets were closed for a holiday. The zloty tested eight-day lows ahead of Polish May inflation data, after prices rose by only 0.3 percent in April.

Emerging sovereign debt spreads tightened by 2 basis points to 283 bps over U.S. Treasuries, but have widened more than 10 bps this week. They reached their narrowest since February 2013 a week ago.

Continuing a recent run of issuance in euros, Morocco began marketing a 10-year euro-denominated bond, according to Thomson Reuters news service IFR, its first euro bond since 2010.

For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Additional reporting by Sujata Rao; Editing by Pravin Char)

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