January 31, 2014 / 7:50 PM / 3 years ago

EMERGING MARKETS-Currencies, stocks steady but pressure remains

7 Min Read

By Walter Brandimarte and Sujata Rao
    RIO DE JANEIRO/LONDON, Jan 31 (Reuters) - Emerging markets
steadied on Friday after a roller-coaster week, but currencies
such as the Russian rouble and the Turkish lira still traded
near multi-year lows despite strong central bank support.
    Emerging market stocks tracked by a benchmark MSCI index
 ended January with losses of 6.7 percent, similar to
those recorded last June, when investors were growing worried
about when U.S. policymakers would start cutting back on
monetary stimulus.
    Emerging markets in general suffered bouts of heavy selling
with a few periods of respite since late last week, and analysts
forecast the selloff has still to run its course before markets
    "We are in a negative feedback loop of weak currencies,
higher interest rates, weak growth and capital outflows," said
David Hauner, head of EEMEA fixed income strategy and economics
at Bank of America Merrill Lynch. 
    "This feedback loop needs to play out and that means at the
end of the day emerging market assets need to become much
cheaper. Only then will people come back to buy."
    Political tensions have grown, with India accusing the
United States of not being mindful of the impact of its policies
on the rest of the world and a top Federal Reserve official
saying that countries that used cheap money to consume, such as
Brazil, will have a hard time as the Fed cuts back on stimulus.
    Meanwhile, the International Monetary Fund urged central
banks to remain vigilant over liquidity conditions.
    Still, analysts said tighter global liquidity resulting from
the Fed's stimulus withdrawal only exacerbates emerging markets'
own problems, which include unsustainable current account
deficits, rising political risks and a possible economic
slowdown in China.
    "What's driving this is the fear of a Chinese slowdown and
what I want to see is some kind of policy action from the
People's Bank of China," said Lars Christensen, chief emerging
markets analyst at Danske Bank.
    In a sign that the turmoil was reverberating in central
Europe, Poland delayed publication of its monthly debt supply
plan until next week due to market turbulence and an overhaul of
its pension scheme. On Thursday, Hungary was forced to cut a   
T-bill auction because of a 67 basis-point jump in yields.
    Hungary's central bank was the latest to wade in with
assurances that it would act to soothe markets if needed, adding
to verbal intervention from India and Russia, as well as big
rate rises in Turkey and South Africa. 
    The Hungarian forint fell as much as 1.6 percent versus the
euro to a two-year low, before trimming losses to
trade 0.8 percent weaker. The country's bond yields jumped 20
basis points across the curve. 
    "Fears are growing that, if the central bank cannot stop the
forint's fall in any other way, this will lead to an interest
rate hike in the end," a bond trader in Budapest said.
    In neighboring Poland, 10-year bond yields rose 10 basis
points to a 4-1/2 month high after the government
delayed its debt supply plan and the zloty lost 1
    The spotlight remained on the rouble. A rally that
started late on Thursday proved short-lived, and the Russian
currency traded 0.7 percent lower.
    Analysts said the central bank's plans for "unlimited
interventions" should the rouble stray outside a target band had
squeezed out short rouble positions on Thursday, but the broad
trend for flight was very much intact.
    The Turkish lira and the South African rand 
both fell about 1 percent but erased losses later, rising 0.2
and 0.7 percent, respectively. South African domestic bond
yields hit the highest since mid-2011 as markets priced in more
interest rate rises in coming months.
    In Latin America, the Chilean peso slid 1.5 percent
while the Brazilian real and the Mexican peso 
erased early losses. 
    The real closed little changed on the day while the peso
gained 0.3 percent. Both closed January with losses of little
more than 2 percent.
    The real remained under pressure even as the central bank
offered as much as $2.3 billion through repurchase agreements to
roll over expiring dollar lines and maintain liquidity in the
currency market. 
    Underscoring investor concern about Brazil's deteriorating
economic fundamentals, central bank data showed that the country
posted its weakest fiscal performance in more than a decade in
2013, falling far short of its primary surplus goal for the
    Despite the recent round of monetary tightening in some
emerging market countries, Mexico's central bank held its
benchmark interest rate unchanged at a record low 3.5 percent.
Colombian policymakers also held the country's benchmark lending
rate steady at 3.25 percent for a 10th month. 
    Key Latin American stock indexes and currencies at 1930 GMT
 Stock indexes                     daily %     YTD %
                    Latest         change      change
 MSCI LatAm         2,901.11       0.47        -9.79
 Brazil Bovespa     47,638.99      0.84        -7.51
 Mexico IPC         40,768.55      -0.58       -4.58
 Chile IPSA         3,410.80       0.57        -7.80
 Chile IGPA         17,007.14      0.41        -6.69
 Argentina MerVal   6,009.41       2.58        11.47
 Colombia IGBC      11,948.75      -0.09       -8.59
 Peru IGRA          15,498.51      -0.33       -1.62
 Venezuela IBC      2,827.91       1.05        3.34
 Currencies                        daily %     YTD %
                           Latest  change      change
 Brazil real        2.4114         0.11        -2.26
 Mexico peso        13.3135        0.41        -2.13
 Chile peso         555.7000       -1.55       -5.33
 Colombia peso      2015.2000      -0.19       -4.13
 Peru sol           2.8220         -0.18       -1.03
 Argentina peso     8.0050         0.12        -18.89

 Argentina peso     12.5500        0.80        -20.32

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