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EMERGING MARKETS-Stocks drop 4 pct amid flight from risk
September 22, 2011 / 8:26 AM / 6 years ago

EMERGING MARKETS-Stocks drop 4 pct amid flight from risk

* Stocks at new 15-mth lows; bond yields surge

* EMBI Plus bond index above 400 bps 1st time since June 2009

* Investor exodus hits emerging FX, triggers intervention

By Sujata Rao

LONDON, Sept 22 (Reuters) - Emerging equities plunged 4 percent to new 15-month lows on Thursday and bond yields surged as investors priced in a grimmer outlook for the world economy, the outflows pushing emerging currencies to multi-year lows versus the dollar.

Chinese data showed a clear slowdown in manufacturing, adding to pessimism generated by the Federal Reserve when it painted a gloomy picture of the U.S. economy. Flagging growth in China means the world’s No. 2 economy may not be able to provide much of a counterweight to the slowdown in the euro zone and United States. .

By 1030 GMT, emerging stocks were down 4.5 percent , extending the previous session’s 1 percent losses and bringing the monthly losses to over 13 percent. In Asia, Chinese, Korean and Indian stocks closed 3-4 percent down.

Emerging dollar bond yield spreads to U.S. Treasuries surged above 400 basis points for the first time since June 2009 and yields on local bond markets also surged.

On currency markets there were heavy losses, with the Taiwan dollar posting the biggest one-day loss in 10 years. Brazilian real and South African rand sustained their biggest daily losses since October 2008 on Wednesday.

“It’s a bloodbath everywhere. People are running to the exit at the same time,” said Murat Toprak, emerging markets strategist at HSBC. “The Fed yesterday delivered something but the market was hoping for more...but there is nothing fundamental behind the selloff.”

With growth coming under pressure, markets were betting on Chinese yuan weakness too. One-year offshore dollar/yuan forwards jumped on Thursday, implying for the first time in 2-1/2 years that the yuan will depreciate in 12 months.

In Korea, the authorities were estimated to have sold $2 billion to stem the won’s fall while Taiwan and Indonesia also sold dollars.

All this drove up the cost of insuring exposure to emerging market. Markit’s iTraxx SovX CEEMEA index , used to hedge exposure to East European, Middle Eastern and African sovereigns jumped 40 basis points to 345 bps, its biggest ever one-day rise while Hungarian, Polish, Russian and Turkish CDS were up 30-40 bps to new 2009 highs.

“Risk aversion has taken over the market which is in capitulation mode,” said Gavan Nolan, senior credit strategist at Markit. “Anything that’s deemed risky, there’s flight away from it to the dollar.”


Russian assets took a lot of heat on Thursday as the country’s economy and markets are heavily geared to global growth and oil, which slid $3 a barrel. Moscow stocks fell almost 5 percent to a one-year low while the rouble hit a 2-1/2 year low against the dollar and a 19-month low to its euro dollar basket .

Russian yield spreads over Treasuries rose 35 bps. Analysts said the added catalyst for currency weakness was selling by corporates which need to repay a chunk of maturing external debt.

“Capital outflows are anecdotally gathering pace....We believe the central bank is selling around $400 million per day at this level and will add another $600 million if (the basket) touches 37.20,” Citi analyst Luis Costa said.

The rouble is around 37 to the basket at present.

In emerging Europe, stock markets fell 3-4 percent and early sharp falls in currencies forced Romania’s central bank to step in and defend the leu . The zloty and forint reversed early losses however, gaining half a percent before easing again to around flat.

“The falls have taken some of these currencies to intervention territory. It’s not only the levels but the pace of losses we are seeing,” Costa said, citing rumours of Hungarian and Polish support for the currencies earlier in the session.

“The interesting thing is I was expecting a poor auction performance in Hungary but the bid cover actually came out quite strong which shows there are still international buyers out there for Hungarian debt.” .

Local bonds too fell heavily, with South Africa’s benchmark issue for instance seeing yields rise back to early August levels, erasing the effect of a record breaking run.

Currency weakness may fuel more selling of local bonds as investors bail out of unhedged positions to protect returns

“It’s become expensive to hedge currency exposure now and many investors are exiting unhedged local-currency positions, just as they exited equity positions weeks earlier,” Toprak of HSBC said. (Reporting by Sujata Rao)

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