* China inflation intensifies broad selloff
* Russian shares, rouble fall sharply on dimming oil outlook
* Turkish, Hungarian risk premiums up, currencies fall
By Sebastian Tong
LONDON, Aug 9 Emerging assets tumbled on Tuesday
to their weakest in over a year as China's higher-than-expected
inflation reading intensified a global sell-off fuelled by the
weekend's unprecedented U.S. credit rating downgrade.
Risk premiums for Turkey and Hungary spiked higher in tandem
with sharp currency losses while Russia's rouble fell over 3
percent as investors braced for a drop in oil demand.
Investors remain risk-averse despite a growing belief that
the Federal Reserve will signal some form of continued monetary
stimulus to stem a financial market meltdown at its policy
meeting later in the day.
The European Central Bank's bond-buying helped to curb
rising Italian and Spanish government borrowing costs but failed
to dispel fears over euro zone sovereign debt given anaemic
growth in the single currency area.
"Expectations of lower growth in developed markets has hit
emerging markets very hard. The most cyclical markets have been
impacted the most and this has happened regardless of
valuations," said John-Paul Smith, head of emerging equity
strategy at Deutsche Bank in London.
By 1005 GMT, emerging shares had tumbled 3.5
percent, down for their sixth straight session but chalking up
narrower losses than Monday when it fell five percent during the
session to mark its biggest one-day fall in over two years.
Emerging sovereign debt widened 3 basis points to
trade at 332 bps over U.S. Treasuries, their weakest levels
since June 2010.
Stronger-than-forecast inflation in China provided another
knock to sentiment. With price pressures still high, Beijing is
unlikely to embark on a stimulus package akin to 2008's, which
helped shore up global demand.
"The assumption that emerging markets are going to come to
the rescue is not right," Smith said.
The prospect of weaker Chinese demand for raw materials sent
Russian shares reeling down 7 percent to their lowest in
over 10 months while the rouble sank to eight-month lows versus
its dollar/euro basket , on track for its biggest
one-day fall on record.
Against the dollar, the rouble plumbed six-month depths
while its fellow commodity-linked currency, South
Africa's rand , sank to 13-month lows.
South Africa's stock market was closed for a holiday.
Emerging European shares saw the heaviest
losses with Czech shares stumbling more than 5 percent to
their weakest in over two years and Romanian stocks
plunging 7 percent to October 2009 levels.
Polish stocks retreated for the seventh straight
session to 13-month lows while Hungary, where worries are
growing about its foreign-currency debt burden, saw its shares
drop nearly 5 percent.
The Polish zloty slipped 0.8 percent to its weakest against
the euro in five months while the Hungarian forint
traded at its weakest since mid-January.
Turkish shares sank to their lowest levels in 1-1/2
years. Turkey is seen as particularly vulnerable to a global
capital retrenchment because of its huge current account
deficit, which is seen exacerbated after the central bank defied
market expectations last week by cutting its policy rate.
On Monday, Turkish Central Bank Governor Erdem Basci told
Reuters the bank could consider rate cuts as an option if
downside risks further threaten economic growth.
The lira was flat after reaching a near 2-1/2 year low
against the dollar .
"If the lira continues to slide, another rate cut would be
very risky, and we would expect any measures taken over coming
weeks to be focused on shielding lira from a much deeper
correction, either via further lira-liquidity injections or
higher daily dollar sales," said RBC Markets in a note.
The cost of insuring Turkish sovereign debt for five years
hit near two-year highs while Hungarian and Russian five-year
credit default swaps reached 28-month and 14-month peaks
(Additional reporting by Sujata Rao and Carolyn Cohn; Editing
by Catherine Evans)