LONDON May 27 Russian stocks slumped 2 percent
on Tuesday and the rouble fell from four-month highs, leading
broad-based emerging market losses as flaring violence in
eastern Ukraine took the edge off optimism fuelled by smooth
The Ukraine vote yielded a clear win for confectionary
magnate Petro Poroshenko who has promised to seek a meeting with
Putin to establish stability in eastern Ukraine. The smooth
election also averts the immediate threat of fresh Western
sanctions against Russia.
But pro-Russia rebels have captured Donetsk airport in
eastern Ukraine, with up to 40 separatists said to have been
killed so far in nearly 24 hours of fighting with Ukrainian
Russian stocks fell 2 percent to one-week lows after posting
0.7 percent gains on Monday. The rouble slipped
0.3 percent, hit by heavy selling of stocks and local bonds.
Regis Chatellier, a strategist at Societe Generale,
attributed the falls to foreign investors taking advantage of
recent gains to shed their holdings.
"Some funds are trying to move out of Russia and they are
selling on strength. People have been waiting to get rid of
Russia exposure," Chatellier added.
The stock market was also pressured by Russia's
second-largest bank VTB, which reported a 98 percent
fall in first-quarter net profit, citing a deterioration in the
Ukrainian and Russian economies. VTB shares fell 3.7 percent.
But Ukraine's dollar bonds, mostly traded offshore, rallied
to six-week highs. London and New York were closed for a holiday
on Monday, which meant traders had to wait until Tuesday to
price the victory.
"The tail risk - that elections would not go smoothly - is
behind us now. The good news is (Russian President Vladimir)
Putin seems to be ready to work with the new president ... but
in eastern Ukraine we are far from any solution and down the
road we cannot rule out a split of the country," Chatellier
Elsewhere, the Hungarian forint slipped 0.25 percent to the
euro ahead of a central bank meeting that is expected
to result in an interest rate cut of around 10 basis points.
Bond yields have fallen to record lows since central bank
governor Gyorgy Matolcsy flagged more rate cuts. Inflation was
at a record low of -0.1 percent in April.
"There is a high probability of an even further reduction in
inflation in May as the effect of the 6.5 percent reduction in
household gas prices will be seen," SEB analysts said in a note.
"In addition, the forint has strengthened ... since the middle
of March. This provides the central bank with manoeuvrability."
Earlier, most Asian markets slipped after weeks of gains.
Investors took profits from the Indian rupee's 5
percent gain this month and Chinese shares slipped as
hoped-for policy steps to boost the economy have not yet
materialised. Indian stocks also pulled back from
record highs as investors booked profits.
All that helped pull MSCI's emerging equity index
down half a percent, retreating from last week's 6-1/2 month
But most analysts saw the weakness as a pause given
ultra-low interest rates in developed countries and the
likelihood of more policy easing in Europe has given a fresh
impetus to the carry trade - buying higher-yield overseas
European Central Bank President Mario Draghi hinted on
Monday at steps to avert deflation.
"We expect the environment for emerging markets to be
constructive. We expect inflows of portfolio investment into EM
equities and bonds, boosting local currency asset prices. There
are so far no hindrances in sight to dampen the carry trade
theme," Credit Agricole said in a note.
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 Jane Merrman)