January 31, 2014 / 4:20 PM / in 4 years

EMERGING MARKETS-Sell-off resumes despite central banks' support

By Walter Brandimarte and Sujata Rao
    RIO DE JANEIRO/LONDON, Jan 31 (Reuters) - Investors resumed
their flight from emerging markets on Friday as the latest round
of central bank actions proved insufficient to offset concern
about rising economic and political risks in many developing
countries.
    Currencies, stocks and bonds fell in developing nations,
from Asia to Europe to Latin America, with the Russian rouble
sliding 1 percent to five-year lows. The turmoil also appeared
to engulf central European countries such as Poland and Hungary,
which fared relatively well in the first sell-off phase earlier
this month.
    "We are in a negative feedback loop of weak currencies,
higher interest rates, weak growth and capital outflows," said
David Hauner, head of EEMEA fixed income strategy and economics
at Bank of America Merrill Lynch. 
    "This feedback loop needs to play out and that means at the
end of the day emerging market assets need to become much
cheaper. Only then will people come back to buy."
    Political tensions were also growing, with India accusing
the United States of not being mindful of the impact of its
policies on the rest of the world and the International Monetary
Fund urging central banks to remain vigilant over liquidity
conditions.  
    Still, analysts said tighter global liquidity resulting from
the U.S. Federal Reserve's decision to cut back on stimulus only
exacerbates emerging markets' own problems, which include
unsustainable current account deficits, rising political risks
and a possible economic slowdown in China.
    "What's driving this is the fear of a Chinese slowdown and
what I want to see is some kind of policy action from the
People's Bank of China," said Lars Christensen, chief emerging
markets analyst at Danske Bank.
    
    SPILLOVER INTO CENTRAL EUROPE
    In a sign that the turmoil was reverberating in central
Europe, Poland delayed publication of its monthly debt supply
plan until next week due to market turbulence and an overhaul of
its pension scheme. On Thursday, Hungary was forced to cut a   
T-bill auction because of a 67 basis-point jump in yields.
    Hungary's central bank was the latest to wade in with
assurances that it would act to soothe markets if needed, adding
to verbal intervention from India and Russia, as well as big
rate rises in Turkey and South Africa. 
    The Hungarian forint fell 1.5 percent to the euro,
hitting two-year lows, while bond yields jumped 20 basis points
across the curve. 
    "Fears are growing that, if the central bank cannot stop the
forint's fall in any other way, this will lead to an interest
rate hike in the end," a bond trader in Budapest said.
    In neighboring Poland, 10-year bond yields rose 10 basis
points to a 4-1/2 month high after the government
delayed its debt supply plan and the zloty lost 1
percent.       
    The spotlight remained on the rouble. A rally that
started late on Thursday proved short-lived, taking the Russian
currency down more than 1 percent.
    Analysts said the central bank's plans for "unlimited
interventions" should the rouble stray outside a target band had
squeezed out short rouble positions on Thursday, but the broad
trend for flight was very much intact.
    The Turkish lira and the rand fell almost 1
percent and South African domestic bond yields hit the highest
since mid-2011, as markets priced in more interest rate rises in
coming months.
    
    BRAZIL MISSES BUDGET TARGET
    In Latin America, the Chilean peso slid more than 1
percent while the Brazilian real and the Mexican peso
 posted more modest losses of 0.5 and 0.3 percent,
respectively.
    The real dropped even as the central bank offered as much as
$2.3 billion through repurchase agreements to roll over expiring
dollar lines and maintain liquidity in the currency market. 
    Underscoring investor concern about Brazil's deteriorating
economic fundamentals, central bank data showed that the country
posted its weakest fiscal performance in more than a decade in
2013, falling far short of its primary surplus goal for the
year. 
    Despite the recent round of monetary tightening in some
emerging market countries, Mexico's central bank held its
benchmark interest rate unchanged at a record low 3.5 percent.
 
    In equity markets, MSCI's main emerging markets index traded
just off 4-1/2 month lows and was on track for its
biggest monthly loss since mid-2012. The Latin American portion
of the index dropped 0.6 percent.
    Domestic emerging bond yields have risen around 40 basis
points since the start of January and sovereign dollar bond
yields have jumped about 50 bps this month on JPMorgan indices.
    
  
    Key Latin American stock indexes and currencies at 1530 GMT
   
 Stock indexes                      daily %   YTD %
                       Latest       change    change
 MSCI LatAm           2,858.39      -1.01     -9.79
                                              
 Brazil Bovespa       47,065.75     -0.38     -8.62
                                              
 Mexico IPC           40,691.03     -0.77     -4.77
                                              
 Chile IPSA           3,370.89      -0.6      -8.87
                                              
 Chile IGPA           16,852.17     -0.51     -7.54
                                              
 Argentina MerVal     5,904.55      0.79      9.53
                                              
 Colombia IGBC        11,911.31     -0.40     -8.87
                                              
 Peru IGRA            15,509.62     -0.26     -1.55
                                              
 Venezuela IBC        2,829.54      1.11      3.40
                                              
                                              
 Currencies                         daily %   YTD %
                                    change    change
                      Latest                  
 Brazil real          2.4258        -0.49     -2.84
                                              
 Mexico peso          13.4120       -0.33     -2.85
                                              
 Chile peso           555.9000      -1.58     -5.36
                                              
 Colombia peso        2023.5000     -0.60     -4.52
                                              
 Peru sol             2.8210        -0.14     -0.99
                                              
 Argentina peso       8.0150        0.00      -19.00

 Argentina peso       12.5000       1.20      -20.00
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