LONDON Aug 28 Emerging stocks retreated from
three-year highs on Thursday, with Moscow-listed shares falling
the most as reports of Russian military incursions into Ukraine
dented hopes for a resolution to the crisis.
The MSCI emerging equities index was down 0.4
percent, while debt insurance costs for Russia and Ukraine both
rose to multi-week highs.
Fears of a spiralling conflict on the Russia-Ukraine border
have brought emerging markets off highs hit on expectations for
further monetary stimulus in the euro zone.
Those expectations were also tempered after sources told
Reuters the European Central Bank is unlikely to take new action
next week unless inflation figures on Friday show the euro zone
sliding significantly towards deflation.
David Hauner, head of Emerging EMEA fixed income and
economics at Bank of America Merrill Lynch, said emerging assets
were unlikely to see a sharp move lower, with the U.S. Federal
Reserve's moves well-telegraphed and little global spillover
from the Ukraine conflict.
"As long as you don't get a more hawkish tone from the Fed,
the risk for EM is limited," Hauner said.
"The genie is out of the bottle and the market will continue
to buy dips in risky assets on the back of the endless
expectations of QE from the ECB."
Russia's rouble-denominated MICEX index, however,
fell 2.1 percent to two-week lows, while the dollar-based RTS
index lost 3.3 percent. The rouble, meanwhile, was 1.3
percent weaker against the dollar, its lowest since March.
Hauner said he was advising clients to stay neutral on
"It's very hard to justify being overweight at this point.
Even though from a valuation perspective there could be an
argument, you have a huge potential tail risk hanging over your
position. The macro case is being totally dominated by
geopolitical risk," he added.
A Ukrainian fighter told Reuters on Thursday the strategic
port of Novoazovsk had been occupied by regular Russian troops
disguised as rebel soldiers, a potentially significant
escalation that will fuel rumours of large-scale Russian
Russia denies military involvement in Ukraine.
Ukraine's five-year credit default swaps surged to new
three-month highs, up 34 basis points from Wednesday's close to
trade at 1,016 bps, data from Markit showed. Russian CDS rose 13
bps to two-week highs.
The fears took a heavy toll on Ukrainian dollar bonds, with
its portion of the EMBI Global bond index widening 14 basis
points (bps) on the day to 895 bps over U.S. Treasuries.
Ukraine's sovereign dollar bonds due in 2017
and 2020 fell more than one
cent each, while the hryvnia slipped 0.7 percent to bid at 13.5
per dollar, approaching the record low hit on Wednesday.
Analysts at JPMorgan said they had moved Ukrainian and
Russian sovereign bonds to underweight in their model portfolio.
"Recent optimism around a negotiated solution to the crisis
as reflected in market pricing appears overdone in our view,"
the bank told clients.
Emerging European stocks also weakened on Thursday, tracking
Western Europe's bourses.
Budapest lost 1.5 percent while on currencies, the
Polish zloty, the most liquid regional unit and often a proxy
for the rest of central Europe, slipped 0.4 percent versus the
euro. It is also weighed down by rate cut
"We see uncertainty in the market caused by the exacerbating
situation in Ukraine. Investors are closing their positions ...
in order to minimize the risk," said a currency dealer at a
major bank in Warsaw.
The Turkish lira was 0.8 percent weaker against the
dollar a day after the central bank unexpectedly lowered its
overnight lending rate.
Saudi and Qatari stocks fell as investors
booked profits after strong gains this week.
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 Hugh Lawson)