LONDON, July 16 (Reuters) - Fear of new economic sanctions pushed Russian equities to new five-week lows on Wednesday, while broader emerging stocks held off recent 16-month highs after hawkish noises from the Federal Reserve boosted U.S. assets.
While Fed Chair Janet Yellen stressed that the inflation picture was not enough to accelerate anticipated interest rate hikes, she also hinted that an unexpected improvement in the job market could lead to faster rate rises than are currently priced in.
Emerging currencies bore the brunt of the losses as the dollar hit a one-month high versus major currencies, pushing the South Korean won to 2-1/2 month lows while in the previous session the Brazilian real eased almost half a percent.
The markets got a bit of a lift from data showing that China’s economy, a key destination for emerging exports, grew a bigger-than-expected 7.5 percent in the second quarter of the year, allowing emerging shares to trade flat on the day
But Russian shares fell for the third straight session, with a 0.5 percent fall as investors worried that Russia may be hit by another wave of sanctions for its involvement in Ukraine when European Union leaders meet later in the day.
EU leaders will work to block loans for new projects in Russia by two multilateral lenders and broaden the scope of other sanctions, according to a draft statement
“Fears of new sanctions have resurfaced in recent days. What could happen if Russia manages to avoid meaningful sanctions is that the United States could go for unilateral sanctions,” said Tatiana Orlova, a strategist at RBS.
“But if no biting sanctions materialise in the next few days (U.S. and European) lawmakers will go on recess and the sanctions talk will die down.”
The rouble weakened very slightly to a new 10-day low .
Orlova played down the impact of the withdrawal of EBRD and EIB assistance, adding: “It’s harsh language but so far I haven’t seen anything that could do much damage.”
The sanctions threat did not prevent Russia’s Promsvyazbank from selling $300 million in bonds on Tuesday at 10.5 percent, $100 million more than targeted. It is the first Russian issuer to sell dollar bonds since the crisis with Ukraine began.
The conflict has also been hitting Ukraine’s economy, forcing the central bank to jack up rates by 300 basis points to 12.5 percent. The hryvnia fell 0.6 percent to a one-week low .
South Africa’s metal workers strike, now in its third week, has disrupted the supply of components to carmakers, pushing Toyota and Ford to halt production at their assembly plants, a development that could worsen the current account gap.
The rand weakened but has held up fairly well given its high yield and expectation of 25 bps rate rise on Thursday.
The rand is also shielded by foreign buying of local bonds. Yields on the 2026 rand bond fell to one-month lows.
“South African local bonds .. still offer great value at 8.25 percent for the R186 (bond),” Societe Generale analysts said.
Central European bond markets are also seeing strong inflows as low or even falling inflation coupled and slowing economic recoveries fuel expectations of continuing monetary easing.
The Polish zloty was flat near one-week highs after Tuesday’s inflation print was higher than expected but even after that upside surprise, Polish policymakers have said deflation remains a possibility and a rate cut may be needed.
Polish two-year bond yields have fallen almost half a percentage point since the end of March.
In bond news, B-rated Ivory Coast was due to issue a 10-year dollar bond around 5.875 percent. Traders saw this as expensive, given that yield offers no premium to existing 2032 bonds.
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 )