October 27, 2017 / 12:55 PM / a year ago

EMERGING MARKETS-Contagion danger as reeling rand hits 11-mth low

* Rand hit lowest in 11-months, bonds slide on downgrade fears

* Turkish lira falls to weakest in three weeks

* Nigeria stocks spared MSCI index relegation

* Stocks set for 2nd week of falls as dollar flexes muscle

By Marc Jones

LONDON, Oct 27 (Reuters) - A emerging market sell off was in danger of snowballing on Friday, as South Africa’s budget woes sent the rand to an 11-month low, Turkey’s lira dropped for a sixth day and emerging bond and stock markets racked up a second week of losses.

Worries that South Africa could soon lose its remaining investment grade credit ratings knocked another 0.3 percent off the rand before it eventually steadied, taking its slump to more than 4.5 percent since the government ramped up deficit forecasts on Wednesday.

That was set to be its second worst week of the year and the country’s bonds were also on the ropes as yields climbed to their highest in 18 months.

The yield on the benchmark 2026 bond rose as far as 9.3 percent before it too began to recover, having started the month at 8.5 percent.

“Our base case is that they (South Africa) don’t get downgraded until next year. But we will be keeping a close eye on the politics,” said Yacov Arnopolin, portfolio manager for emerging markets portfolios at Pimco.

“We are currently neutral local currency debt in South Africa, and that’s worked out nicely in the last couple of days.”

Turkey, another traditionally volatile EM performer, also remained under pressure, hit by concerns about monetary policy and Ankara’s souring relations with key allies.

Turkey’s central bank kept key interest rates steady as expected on Thursday, resisting calls to tighten policy after core inflation spiked to a 13-year high last month.

The lira fell 0.4 percent against the dollar, dipping to its weakest level since end of January, whilst the benchmark 10-year bond yield went as high as 12.15 percent.

“We have known the Turkish problems for the while,” said Credit Agricole strategist Guillaume Tresca. “But the fact is the market was very long the lira to catch the carry, and now the pressure is gradually rising and some people are unwinding their positions.”

Russia’s rouble tumbled 1.4 percent to its weakest since end-August after the central bank cut rates by 25 basis points to 8.25 percent and said it would consider lowering rates further in the coming months.

The Kremlin expressed concern about possible new U.S. sanctions against Russia, but Moscow shares remained in positive territory, up 0.7 percent.

MSCI’s benchmark emerging stocks index was trading flat, but set to end the week down over 1 percent.

Venezuela’s state oil firm PDVSA began the process of making payments on the 2020 bonds due on Friday, arresting some of the price falls seen on Thursday amid concerns the payments would be missed.

The Russian finance ministry also said it had agreed to restructure $3 billion of Venezuela’s debts to Moscow.

Kenyan bonds fell as a low turnout from voters in its re-run presidential elections fanned fears of public unrest from opposition supporters.

In other Africa news, influential index provider MSCI said it was no longer considering relegating Nigerian stocks from its widely-tracked frontier market index.

Its central bank head also said he expected inflation rates to fall at a faster pace and hit high-single digit rates by the middle of next year.

For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1108.17 +0.01 +0.00 +28.52

Czech Rep 1060.39 +3.69 +0.35 +15.06

Poland 2485.43 +29.26 +1.19 +27.59

Hungary 39912.78 +23.18 +0.06 +24.72

Romania 7862.82 -16.71 -0.21 +10.98

Greece 742.72 +2.92 +0.39 +15.39

Russia 1107.13 -11.06 -0.99 -3.92

South Africa 52306.49 +32.97 +0.06 +19.14

Turkey 07847.99 +513.21 +0.48 +38.02

China 3416.42 +8.85 +0.26 +10.08

India 33157.22 +10.09 +0.03 +24.53

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 25.67 25.68 +0.03 +5.20

Poland 4.25 4.25 +0.15 +3.72

Hungary 311.33 310.54 -0.25 -0.81

Romania 4.60 4.59 -0.08 -1.38

Serbia 119.25 119.26 +0.01 +3.44

Russia 58.63 57.84 -1.35 +4.49

Kazakhstan 335.07 333.81 -0.38 -0.42

Ukraine 26.78 26.82 +0.13 +0.82

South Africa 14.22 14.23 +0.07 -3.44

Kenya 103.60 103.70 +0.10 -1.19

Israel 3.54 3.53 -0.45 +8.70

Turkey 3.82 3.82 -0.04 -7.70

China 6.65 6.64 -0.21 +4.36

India 65.06 64.83 -0.35 +4.44

Brazil 3.29 3.29 -0.10 -1.22

Mexico 19.27 19.20 -0.36 +7.47

Debt Index Strip Spd Chg %Rtn Index

Sov’gn Debt EMBIG 306 0 .10 7 99.30 1

Reporting by Marc Jones; Editing by Toby Chopra

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