LONDON Aug 7 Russian bond yields surged to multi-year highs on Thursday as food import restrictions fanned inflation fears, while the rouble hit new 4-1/2 month lows, leading a swathe of emerging currencies slipping against the dollar.
President Vladimir Putin ordered food import restrictions on countries that have imposed sanctions on Moscow over the Ukraine crisis, a decision that will hurt the West but will also exacerbate Russian inflation and deepen its isolation.
The Russian losses coincide with a general investor retreat from emerging markets, with currencies such as the Indian rupee , Turkish lira and Korean won at multi-month lows against the dollar. In central Europe, the Hungarian forint traded near 2-1/2 year lows against the euro.
The dollar stands just off 11-month highs against a basket of currencies after a raft of robust economic data that indicated the U.S. Federal Reserve is on course to start raising interest rates from next year.
"People are increasingly challenging the Fed's dovish stance and believing that it is unsustainable. The pressure has been for buying dollar, paying bearish trades on the short-end (of Treasury curve) and taking profit on equities," said Koon Chow, a strategist at Barclays.
"This pressure will sustain until we get capitulation from the Fed and we get a (policy) road map."
Emerging stocks fell for the third straight day to six-week lows as foreigners dumped holdings from India to Poland.
Russian stocks hit three month lows, with shares in food retailer Magnit - a favourite with foreign equity investors - slumping more than 3 percent after news of the food import ban.
Russian bonds took a heavy hit from the news, with some analysts estimating the import ban would add 1.5 percentage points to annual inflation, already running around 7.5 percent year-on-year.
Ten-year yields hit 4-1/2-month highs, having risen 150 basis points this month, while the five-year yields were at two-year highs.
Alfa Bank analyst Natalia Orlova said earlier meat import bans had already led to an 11 percent year-on-year increase in meat prices. Rouble weakness - the currency is down 10 percent this year so far - would add to pressures, she added.
"The ban on food imports ... requires a revisiting of the short-term and medium-term inflation outlook, which has deteriorated significantly in recent months," Orlova said.
However, she predicted the central bank would not raise rates in response. "As the inflation shock is largely non-monetary, we believe that ability to repress it through monetary instruments will be limited, and we see an inflation target at 8.0 percent for 2015."
Shares also felt the heat from government plans to raid pension savings for the second year in a row, with state-run banks Sberbank and VTB down 2 percent.
The losses have rippled outwards, with food companies' shares dipping across Europe. Polish stocks in particular fell more than 1 percent, with meat producer Duda down 0.3 percent, extending Wednesday's 1.3 percent fall.
Also in the neighbourhood, tensions have flared between Azerbaijan and Armenia over the disputed Nagorno-Karabakh region, hitting both countries' dollar bonds, though they have clawed back steep losses from earlier this week.
Armenia's 2020 dollar bond rose 0.7 cents in the dollar but is down 3-4 cents since the start of August while Azerbaijan's 2024 issue rebounded 1 cent after falling 5 cents earlier this week.
Neighbouring Georgia is not directly involved, but its 2021 bond is down 4 points this week as the clashes raised the risk of wider conflict in the Caucasus.
Standard Bank analyst Tim Ash said Armenian assets were most vulnerable, given that oil-rich Azerbaijan boasted significant hard currency reserves, equal to 30 months of import cover, and low debt levels.
Armenia has a debt-to-GDP ratio of close to 50 percent and a current account deficit of more than 10 percent.
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 ) (Editing by Kevin Liffey)