| LONDON, July 11
LONDON, July 11 Emerging European stocks
recovered on Friday after losses caused by reports of debt
problems at Portuguese bank Espirito Santo, though steep falls
in Asia kept broader emerging equities at one-week lows.
Worries about a new round of financial fallout from Europe
had rippled across the world in the previous session, triggering
losses on Wall Street and countering the buoyancy in emerging
assets that had been prompted by a bet that U.S. interest rates
would not rise any time soon.
But Portuguese stocks recovered on Friday and helped lift
sentiment across Europe, with MSCI's emerging European index up
half a percent after slumping to three-week lows in the previous
session. Stocks in Poland, Turkey and Hungary
rallied by 0.5-1.0 percent while Russia was up 0.3 percent
Citi strategist Ishitaa Sharma said that after the initial
knee-jerk selling there was more comfort that problems at Banco
Espirito Santo were unlikely to trigger a
Europe-wide banking crisis.
The catalyst for a significant emerging markets correction
would be a hawkish U.S. Federal Reserve, Sharma said, predicting
the current low-interest rate environment would keep investors
chasing carry - the higher yields available in emerging markets.
"We need a more consistent rebound in U.S data before we see
an aggressive repricing of EM risk ... It's very expensive to be
long dollar versus emerging markets and bleed negative carry,"
But despite the recovery in Europe, MSCI's emerging equity
index was 0.4 percent lower, having reached 13-month
highs earlier in the week as big Asian markets fell in reaction
to the previous session's Wall Street losses.
The index looks set to snap a two-week streak of gains.
In Asia, political developments continued to dominate.
Indonesia's rupiah was up 2.5 percent over the week, its
largest weekly gain since mid-February, expectations of an
election win by Joko "Jokowi" Widodo, seen as more
business-friendly than his rival, ex-general Prabowo Subianto.
But uncertainty about the final result held the rupiah
back on Friday, pushing it down against the dollar.
Indian stocks and the rupee also fell on profit taking
following a scintillating run that saw the equity market hit
successive record highs on reform hopes .
In Russia, the rouble weakened, down 0.3 percent against
both the dollar and the euro
partly attributed to data showing the economy only marginally
skirted a technical recession in the first half.
Economic sluggishness was exacerbated by Western sanctions
imposed on Russia over its role in the Ukraine crisis.
Stock market gains were capped by a 10 percent drop in the
shares of debt-ridden Russian mining company Mechel,
adding to a more than 8 percent drop in the previous session
after the government said the company may be allowed to declare
bankruptcy to sort out its finances.
The shares of Hungary's biggest bank, OTP were
flat after early losses, though they have fallen almost 20
percent from a peak on June 2.
A law passed by Hungary's parliament and government plans to
convert foreign currency loans later this year have triggered a
string of profit warnings from banks that operate in the
Hungarian CDS rose to 166 basis points from 160 basis points
on Friday, according to Markit, the highest level since early
Turkey's lira bucked fears of fallout from
Portugal by data showing the country's current account deficit
was narrower than feared - $3.43 billion in May, compared with
$4 billion predicted in a Reuters poll.
Turkey's trading gap is considered its economic weak point.
"All in all, these are healthy numbers ... We are on track
to hit our full year current account deficit forecast of 5.5
percent of GDP. But this will still be one of the largest
external deficits in emerging markets," Deutsche Bank chief
economist Robert Burgess said in a research note on Friday.
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 Robin Pomeroy)