Emerging markets hit by slew of bad news

2011-07-11 12:45

London - Emerging stocks dropped 1% to 10-day lows on Monday, burnt by negative news on the US and Chinese economies, while the extension of the eurozone debt crisis to Italy hit eastern European debt markets.
A weaker-than-expected US jobs report on Friday and data showing China's import growth fell to its slowest pace in 20 months encouraged investors to sell risky assets.

Focus in the eurozone debt crisis has shifted to the political stomach for austerity measures in Italy, a country which has the eurozone's highest sovereign debt ratio relative to its economy after Greece.

The European Union is holding an emergency meeting on Monday after a sharp sell-off in Italian assets on Friday.

"We don't have a global economy which looks in the best shape and given all the discussions of a dramatic slowdown in the developed world, that is not a good backdrop for risk appetite," said Michael Ganske, head of emerging markets research at Commerzbank.

In relation to the eurozone debt crisis, Ganske said: "The financial sector is the main reason for contagion. As a bank, when you lose money on the periphery you have less willingness to take more risk on board."

The MSCI emerging equities index dropped 1% to its lowest since July 1 and is flat on the year.
The Thomson Reuters emerging Europe index dropped 0.8% to two-week lows, with Hungarian stocks hitting four-month lows.

Emerging sovereign debt spreads edged out by 2 basis points to 277 bps over US Treasuries.

Emerging European currencies generally fell around half a percent against the euro, though the low-yielding Czech crown, often seen as a safe haven, briefly hit three-week highs.

Analysts identified links between Italian banks and countries in the region, based on Bank for International Settlements data.

"The Balkans ... could be facing some pressures, should the situation get worse. Croatia could be in the spotlight in this respect, similarly to what we saw in the case of Romania and Bulgaria a few weeks ago due to the exposure to Greek banks," said analysts at BNP Paribas in a client note.

"Bulgaria is not that far behind this time ... Serbia and Hungary close the list of countries that could see some stress."

The cost of insuring emerging European countries' debt against default rose sharply, hitting two-week highs, according to data from Markit.

Romania's five-year credit default swaps hit 263 bps, up 14 bps from Friday's close. Bulgaria's five-year CDS rose 11 bps to 234, Hungary's gained 20 bps to 300, while Turkey's rose 7 to 182 bps and Poland also climbed 7 bps to 165.

Turkish assets were also under pressure from data showing the country's current account deficit rose 164 % on the year to $7.75bn in May.

Turkey's huge current account gap and unorthodox monetary policy have taken the gloss off a market which until recently was seen as a regional star. The lira fell 0.8%, inching back towards 26-month lows hit at the end of June.

The Ukrainian hryvnia hit two-week highs, however, supported by the passage last week of the country's pension reform bill, a measure needed to unfreeze a $15bn IMF programme.